Last week, 2-year & 10-year Treasury yields were up 5 and down 3 BPS, respectively, further inverting the curve. The minutes from the January FOMC meeting came out on Wednesday, with the consensus being a delay to the cutting cycle (and no hikes). The Philadelphia Fed president spoke hawkishly on Thursday and reiterated this sentiment, cautioning not to expect any cuts too soon.
This week we have consumer confidence numbers, as well as GDP and PCE data to watch for on Wednesday and Thursday. ISM numbers will be released on Friday. There are also several significant TSY auctions this week. Normally this isn’t a big focus, but there’s currently a lot of consternation in the market about the volume of debt being sold.
Overnight SOFR has ticked down slightly to 5.31. This could be due to lighter demand for repo borrowing. The 2-year Swap rate is up almost 50 BPS on the year, which is another word of caution for everyone that was anticipating 7 or 8 cuts heading into the year. There are currently between 3 and 3.5 cuts priced in for 2024, per Bloomberg’s WIRP model.
Volatility has been more restrained in the derivative markets lately. Caps are trading with solid execution, but many are still looking to shorten their trades hoping for greener pastures down the road. This trend applies outside of just hedging execution as well. Terms for a lot of new Freddie Mac K-Series and non-agency CMBS issuances are being shortened. 5-year money is very attractive with the hope rates will come down eventually. The expectation is that lending volume in general will increase throughout the year.
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