SOFR Spikes into Quarter-End
Prior Week Summary
The first half of the year is officially in the books and market participants are taking stock of positions heading into the holiday-shortened week. Equities, as measured by the S&P 500 index have underperformed lofty expectations, gaining only 1.7% year-to-date. At the half-time break, the consensus forecast for the S&P by year-end equates to a roughly 8.5% increase from current levels, according to data compiled by Bloomberg. In contrast, the cover-story of a widely read financial newsletter has called for the end of the bull market, advising caution on the transitory impact of the tax cuts, and the impact of higher interest rates.
On the other hand, interest rate markets have sold off considerably in a flattening move led by the front end of the curve increasing by roughly 60 basis points while the long-end increased approximately 40 basis points. The spread between 2-year and 10-year Treasury notes has collapsed to 33 basis points. As of this writing there are 2 additional rate hikes priced into the market before year-end, with increases expected at the September and December fed meetings.
For those watching the dynamics between the new secured risk-free rates (SOFR) and the legacy unsecured benchmarks (Fed Funds and LIBOR) this quarter-end has been interesting, with secured rates rising meaningfully above the unsecured rates as large non-domestic financial firms de-leveraged into quarter-end. The volume-weighted median SOFR priced at 2.12%, while the 99th percentile rate spike to 2.37, higher than 1 month LIBOR and 3 month LIBOR respectively.
The economic news of the week was the downward revision of the first quarter GDP estimate to 2.0% from 2.2% in the prior estimate. Analysts attributed the negative revision to slower than anticipated consumer spending growth and smaller inventory builds.
The Look Forward
For those of us not on vacation this week, the market will look forward to the minutes of the latest FOMC meeting on Wednesday and the results of the June employment report on Friday.
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
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit http://www.chathamfinancial.com/legal-notices/.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions.