INTC - Trade of the Week

The 1-month bill is finally trading above the overnight rate. It won’t surprise us to see the market rallying as of this writing (7/18/2022.) In addition, whatever was keeping 1-month and 2-month bills below the overnight rate appears to have gone away.

• 1-day – Overnight Repo – 1.53%
• 1-mo – 4 week bill: 1.99%
• 3-mo – 13-week bill: 2.4%
• 6-mo – 26 week bill: 2.93%
• **1yr – 52 week bill: 3.16%**
• 2yr note: 3.15%
• 3 yr note: 3.16%
• 5yr note: 3.06%
• 7yr note: 3.05%
• 10 yr note: 2.96%
• 20 yr bond: 3.36%
• **30yr bond: 3.11%**

As mentioned during previous Masters in Trading’s Friday Breakdown sessions, this is not normal behavior. There is no financial gain in the trade, yet billions of dollars are booking lesser profits, foregoing the higher returning, fully collateralized, risk-free overnight rate with the Fed as the counterparty.

My conclusion is that this is a collateral issue and the best kind of collateral are short term Treasury Bills. These are the most cash-like instruments out there, thus their high demand. Coupled with low new issuance from the Treasury. 

Now that we see some of this pressure being lifted, as per the now higher rates, I suspect the market will continue rallying. This repricing is reflective of the latest CPI print and the likely case that the Fed hikes by 100bp in the upcoming FOMC meeting.

Assuming we get a 100bp hike, this would immediately put overnight rates above the 1-mo, 3-mo bill rates once again, assuming they don't move at all. Watching how the bill market reacts will be paramount.

The thesis here is that if 1-mo and 3-mo bills rise in tandem with the Fed's next hike and end up above the overnight rate as they are today (just 100 or 75bp higher, or whatever the amount ends up being), we can then derive the collateral problem has been patched for the time being and more upside continues.

However, if bills don't rise in tandem with the Fed or if the rise is lackluster and once again leaves short-term T-Bill rates below the overnight rate, the collateral problem persists and would be considered bearish under this thesis.

Some fun facts per the chart below:

• The 52-week / 1yr  bill is at 3.16%. The 30yr bond @ 3.11%… The 1yr-30yr curve is inverted by 5 basis points!
• 6-mo bill @ 2.93%, while the 10yr note @ 2.96%. The 0.5yr-10yr curve is positive only by 3 bp.
• 6-mo, 1yr, 2yr, 3yr – [the front end] – is collectively higher yielding than the back end, 5yr, 7yr, 10yr, 30yr.
• The 20yr Bond is somewhat new, and not many issues have been auctioned relative to other tenors – this helps explain some of the premium on it since its inception.
• Bank stocks tend to do quite well in these environments.
• GOLD has its large rallies during times when TIPS yields start going down. They've stopped going up, on all 3 tenors – 5, 10 and 30yr – since 6/13/2022. I'm getting back into Gold as soon as I see TIPS yields start to drop.