SOFR

The b- bond market is just literally following oil prices, and that is, by the way, that is across the curve.

You look at, uh, you look at Europe, you look at SOFR, so you look at the US in the last two weeks, that's literally... or last three weeks now since oil has been rising from around $80.

That's literally the same, uh, uh, levels that, uh, um, the same levels and the same price movement as oil.

You, you wouldn't be able to tell which line would be fixed income, which line would be oil.

...

SOFR.

SOFR was nothing, plus a 200 point, 250 basis point spread.

So I mean, you...

It might've...

The Fed said it would reserve management short-term Treasury purchases R&P for a second straight month after determining that bank reserves and the banking system are ample.

The move reflects the view that the short-term funding market is functioning smoothly and that SOFR has remained at or below the interest rate on reserve balances.

On Wall Street, forecasts are split over the timing of a restart in purchases and the size of those purchases if short-term Treasury issuance increases.

So eventually they're going to have to do that again is what it sounds like.

Kevin Warsh just took over.

So is he going to follow his predecessors and try to not shock the market, not try to create offsides positions in the money market in SOFR futures with the decision that he delivers, basically being in accordance with the market? Or does he want to make a point and say, I told you forward guidance is a thing of the past.

We're not going to tell you what we're going to do and we're not going to be pushed around by the market.

So I actually think tomorrow's decision is quite interesting.

Let me walk you through a real illustration of what that collateral quality is worth using the book's own worked example.

A German industrial group needs to execute a 200 million euro five-year euro-dollar fixed for floating swap to hedge a dollar bond issuance paying euro fixed and receiving dollar SOFA floating.

The Treasury solicits quotes from five dealers electronically.

The offers cluster closely, but two stand out.

Five thirty's Treasury has flattened.

It has flattened versus SOFR.

It wasn't an abject failure, but it's, it's way too small, and it needs to be beefed up.

And the only scope for that, it's not in the buyback tool, you know, as we've written as the team, that it's a very limited tool.

But, you know, let's see how this all plays out here.

But the other point I want to make clear is that this bond sell-off is not necessarily all that bad, because if you look at, you know, for example, the neutral rate of interest Proxies for the neutral rate of interest, for example, like three- or four-year-old SOFR yields, where the Fed policy is likely to be, those have been climbing steadily higher there.

Why are they climbing steadily higher? It's not because of break-even inflation rates on the back end are marching.

They're steadily higher.

And you're not sort of feeling that from the bond side.

One thing I'm also going to mention here, which is that, you know, like when you try to deconstruct the components of the sell-off, you know, we talked about real rates.

We talked about long-term policy rates through SOFR down the road.

But, you know, there's obviously this big question of record deficits getting even higher here.

Right? So, like, I'm not gonna sit and say the math is the math, but I think that, you know, there's a good pickup in the, in that middle seven to 10, and yet that will be impacted by Fed pricing.

So if you don't trade SOFRs, 'cause again, convexity's, like, you gotta use leverage to get the convexity on the short end, right? So y-

Yeah

... as a plain vanilla, you're not gonna get any juice if you just do some two-year bond or something and it's fully collateralized.