The Pandemonium Special Edition - T10 to 3.35%?
August 5, 2024 You lucky dogs, you get to hear from us twice today. The panic trade continues, driving front end yields down 20bps and the T10 down 12bps to 3.67%. Futures put odds of a cut at 60% within a week! Wells came out last night and updated its forecast to call for 1.25% of cuts by year end. If a picture is worth a thousand words, here's 5,000 words worth.
There isn't a lot of technical resistance between current T10 levels and 3.35%. That doesn't mean the T10 will plunge to that level, but it does make it hard for a trader to step in front of this panic trade.
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Source: Bloomberg Finance, LP
The T2 is down 21bps this morning.
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Source: Bloomberg Finance, LP
This helps cap prices. Pricing is all over the map right now, but here's an example:
$25mm 2yr 4.00%
Today: $175k
1 Week ago: $280k
It would be more if not for the offset from surging vol.
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Source: Bloomberg Finance, LP
Financial Conditions are tightening rapidly. Like the unemployment rate, a snapshot here would suggest everything is under control. But it's the pace of change that has markets on edge.
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Source: Bloomberg Finance, LP
The yield curve is nearly uninverted - less than 1bps.
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Source: Bloomberg Finance, LP
As much as I would love to believe in this trade, it feels overdone. Unfortunately, we have a very quiet data week which means markets could continue swinging wildly. We get some ISM Services data at 10am, which normally wouldn't be a market mover but is suddenly very important. A strong number helps put a floor in this rate drop. But if it comes in unexpectedly weak, look out below.