Eurodollar Futures Volume Surge Anticipates Fed Taper Signal (Are You Ready For Feddy?)

The next Federal Reserve Open Market Committee (FOMC) meeting is next week with an announcement on Wednesday, September 22nd.

(Bloomberg) — Volume in the December 2024 eurodollar futures contract has surged Friday, approaching 200k, highest in the strip. Weekly volume exceeds 800k ahead of next week’s FOMC meeting. The December 2024 contract is a proxy for the Fed’s taper timeline, similar to the belly of the Treasuries curve (aka, the belly of the beast).

As of 2:30pm ET, nearly 197k Dec24 eurodollar contracts had traded, bringing weekly total to 816k, third most in its lifetime; notable flows on the day have included three block trades for 5k each:

The contract also appeared in curve trades including 9.3k Sep24/Dec24 3-month, 18.9k Dec23/Dec24 12-month and 24.8k Dec22/Dec24 24-month

The Dec22/Dec24 eurodollar spread has been in the spotlight since Morgan Stanley recommended the steepener in June as a way to exploit the disconnect between expectations for the pace and timing of Fed rate increases

As of today, we see a kink in the US Dollar Swaps curve at 21m.

With inflation the highest since 2008, and M2 Money still growing at 12.1% YoY, it is time for The Fed to take it foot off the accelerator pedal.

The Fed’s Dots Plot as of the last FOMC meeting indicates a willingness to let the Fed Funds Target rate start rising again after over a decade of rate suppression.

Given the fear of The Fed tapering (eventually), is it any wonders alternative investments such as Bitcoin have risen as The Fed cut rates?

Will Fed Chair Jerome Powell and the gang announce a change on September 22nd? Probably need a fortune teller to answer that question.

Fed’s Ability to Set Rates Floor Is Weakening on Cash Deluge (“Charming” Powell Had At Least 350 Meetings, Dinners Or Phone Calls With Members Of Congress)

Powell and The Fed’s policies have veered from their mandate requiring Chairman Powell to meet 350 times with Congress to sell The Fed’s policies.

Bloomberg) — The Federal Reserve’s floor for overnight funding markets is proving to be no match for the deluge of cash. 

Money-market securities ranging from Treasury bills to repurchase agreements continue to trade below 0.05% — the offering rate on the overnight reverse repo facility, which is supposed to act like a floor for the front end. The Fed at its June meeting had raised the rate by five basis points to help support the smooth functioning of short-term funding markets.

Still, usage of the tool climbed to a record $1.136 trillion on Monday, eclipsing the previous high of $1.116 trillion on Aug. 18. 

Demand for the so-called RRP facility has surged as a flood of dollars threatens to overwhelm funding markets. That’s in part a result of the central bank’s long-standing asset purchases and drawdowns of the Treasury’s cash account, which is pushing reserves into the system. As a result, liquidity has been swelling, especially as the Treasury cuts supply to create more borrowing room under the debt ceiling.

The pressure pushing down overnight rates toward zero is proving a major headache for money-market funds. It hampers their ability to invest profitably, and can lead to further disruptions as they begin to waive fees to avoid passing on negative rates to shareholders. A number of firms including Vanguard Group shut down prime money-market funds last year after struggling to cover operating costs in the low-interest-rate environment.

Yes, overnight rates such as the US SOFR rate, are near zero.

Powell’s Charm Offensive in Congress Positions Him to Keep Job

Perhaps that is why Federal Reserve Chair Jerome Powell is acting as a lobbyist with Congress for The Fed’s nontraditional approach to monetary policy.

(Bloomberg) Since he took the helm of the Fed in February 2018, through June of this year, he’s held at least 350 meetings, dinners or phone calls with members of Congress, according to his monthly calendars. That’s almost nine per month, and many of those included more than one lawmaker. The tally doesn’t count at least 16 appearances as chair before numerous congressional committees.

Well, the stock market has zoomed-up since Bernanke and The Fed adopted zero-interest rate (ZIRP) policies and the now famous quantitative easing (QE) policies in late 2008.

Congress member Alexandria Ocasio-Cortez asked Fed Chair Powell about the Fed helping with US unemployment. We are already at zero rates (on the short-end), and Congress should look at their policies on why labor force participation is slow to recover from the Covid epidemic.

Powell is sounding more and more like Parks and Recreation’s Tom Haverford in terms of schmoozing Congress for support.

Update: The Mises Stationarity Index is flashing “BUBBLE.”

The Mises Stationarity Index is different than the Shiller CAPE index, which is showing equities as being overpriced, but not yet in bubble zone.

Treasury And Mortgage Rates In A Never-Ending Balance Sheet World (REAL Mortgage Rates NEGATIVE With Skyrocketing Home Prices)

Headline! “Fed’s Kaplan says delta variant could cause him to rethink his tapering view”

Face it, the Federal Reserve may alter its growth path on asset purchases of Treasuries and Agency Mortgage-backed Securities, but it is doubtful that they will pare back their balance sheet. Call it “A Never-ending balance sheet for you” world.

Why? Seemingly never-ending Covid crisis, etc.

Let’s look at US Treasury yields today. The 10-year Treasury yield is up slightly to 1.25% as of 10am EST.

Here is a chart of the 10-year Treasury yield, Fed Funds effective rate, Fed Balance sheet and reverse repos since the Covid outbreak and Fed massive intervention. Bottom line, the have repressed the short-term interest rates and put downward pressure on the 10-year Treasury yield.

As the 10-year Treasury yield remains repressed DESPITE HIGHEST INFLATION RATE SINCE 2008, the Freddie Mac 30-year mortgage rate remains repressed as well. Yes, that mean NEGATIVE REAL MORTGAGE RATES.

This produces a REAL mortgage rate of -2.56%.

The spread of mortgage rates over the 10-year Treasury yield is about 173 basis point since 1971.

Where will Treasury yields go from hear? If we believe technical analysis like the Ichimoku Cloud, the 10-year Treasury rate will likely rise.

And The Fed’s Dots project also see rates rising (at least on the short-end.

Negative real mortgage rates and blistering home price growth?

Will the attendees at the KC Fed Jackson Hole conference discuss these matters? Or will it just be a Federal Reserve Soul Shake (dance)?

Mortgage Investors Flood the Fed With Bonds for Sale (Fed’s O/N Rev Repo Purchases Still Above $1 Trillion)

(Bloomberg) — Last week was notable for the tsunami of agency mortgage bonds offered to the Federal Reserve during its routine purchase operations on Friday.

The central bank’s quantitative easing schedule called for it to buy $2.9 billion of 30-year uniform mortgage bonds Friday, and that was nothing outside of its usual pattern. However, mortgage investors flooded the Fed with $15.06 billion of bonds for sale, the largest daily amount offered during a single operation since April 1, 2020.

In terms of how that compares to the total amount purchased, investors offered 5.2 times as much as were eventually taken down by the central bank. That is well above the 2.3 times average for 30-year uniform mortgage bond operations seen during all of this round of quantitative easing, and the second-highest overall. The highest submission ratio was the 5.5 times seen on July 16, 2020.

There are a number of reasons this could have happened. Investors may have wished to lighten their positions before the summer doldrums of late August, when many desks are lightly staffed due to vacations. Also, tight sector valuations or concerns about a sooner-than-expected taper may have played a part.

While this may simply be a one-off event and no reason for concern, it is certainly something to keep an eye on in case it heralds a change in investor sentiment.

In related news, the Treasury’s overnight reverse repos purchases remain about $1 trillion.