Season 3 – The Art of the Deal?
Prior Week Summary
The turn of the calendar brought no relief from the recent volatility that has gripped markets as of late. The government shutdown continues, as the administration postures for a way to push through taxpayer financing for a wall on the border with Mexico. The President has threatened to keep the government closed indefinitely as a negotiating tactic to achieve his objective. The turn of the year also brought elevated volatility to funding markets, which put the differences between LIBOR and SOFR on full display. Volumes in the underlying financing transactions, which ultimately feed into the SOFR index, increased significantly, topping a trillion dollars for the first time in the history of the index. The volume brought the spot SOFR setting as high as 3.15% on the first trading day of the new year, before falling back to 2.45% this morning. The dispersion in the SOFR funding rates was also quite remarkable, as the spread between the 1st and 99th percentile funding rate was over 350 basis points on the last day of 2018. It is instructive to look at the year-end relationship between the secured SOFR rate and the unsecured LIBOR settings for insight into how this rate may react in the future. Certainly, many not familiar with the mechanics of the repo markets would find it surprising to see SOFR set over 60 basis points higher than 1 month LIBOR, and jump 70 basis points in 2 days in the absence of any movement in the effective fed funds rate.
The economic news of the holiday-shortened week was the 312,000 increase in non-farm payrolls in December, the largest gain on the index in nearly a year. The positives in the report were broad-based and may indicate to some that the economy is stronger than many thought, and has the potential to keep the Fed on track.
The Look Forward
The market will be looking forward to updates this week on the state of the manufacturing sector, consumer prices and the minutes of the December FOMC meeting. There will also be numerous delays in economic statistics, given the current government shut-down.
Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Source: Chatham Financial
Fixed Income Snapshot
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