I normally skip the Monday after a Fed meeting because I send out a blast on Wednesday afternoon, but Friday’s volatility was so historic I had to put it into perspective. In fact, all by itself Friday would have been one of the most volatile weeks ever.
Last Week This Morning
10T: 4.38%·
2T: 3.89%·
SOFR: 3.67%·
Term SOFR: 3.68%
Rates
Rate vol had a historic week and interest rate caps got crushed. Here’s the BofA Move Index, which tracks rate volatility. Friday was in heady company.
Markets totally ignored my newsletter last week and decided the oil shock will, in fact, result in hikes. Odds of a hike this year surged through 50%
The T10 wasn’t much better. We ran some analysis on how volatile last week was. To our surprise, it was only in the 68th percentile for 10yr rates. Bad, but not terrible.
Since 1990, the average absolute weekly variance of T10 moves is 10bps.
The max is 84bps. Last week was 16bps and I thought I was in a blender. The worst weekly moves were 5x that.
This led me to wonder, “If you could just avoid the X most volatile weeks, how much better could you manage your risk?” We carved out the top 10% most volatile weeks and the worst-case scenario plunged to 32bps.
In other words, avoid the 26 most volatile days of the year, and you can expect your T10 rate lock to trade within a band of just 7bps.
“But JP, how do I avoid the 26 worst days?”
If I knew that, I wouldn’t be writing this newsletter on a Sunday while March Madness is playing in the background…
Last week, I highlighted the next resistance level on the T10 was 4.35% and then 4.49%. We broke 4.35% on Friday.
Today will likely determine whether 4.35% is the new floor or if the T10 drops back down and 4.35% is the top end of the range.
Caps Got Crushed Like the Heels Giving Up a 19 Point Lead to VCU…
We had so many people asking how their cap price doubled in one week that Josh Mills, the head of our caps team, wrote up a nice piece. I’m just going to plagiarize so I can get back to basketball.
At a high level, cap pricing is driven by three components:
Floating Rate Expectations
Floating rate expectations drive the intrinsic value of the cap (expected payout).
Volatility
Cap volatility is commoditized and traded, making its value market driven just like floating rate expectations. This represents the premium for uncertainty in floating rate expectations.
Volatility can spike severely in just days or weeks, but generally takes months to settle. We saw two notable spikes from the election (Nov '24) and the sweeping tariff announcements last year (Apr '25). We didn't fully settle from those spikes until the beginning of this year.
Although the magnitude of the recent volatility spike is similar to the election and tariff spikes, volatility is still about half of those levels.
We’ve all seen that Trump seems to respond to markets, but even if he does, just know that vol takes a while to settle down. Cap prices may be elevated for a while.
Cap Provider Profit
Cap providers price caps based on their intrinsic and volatility values, then add a flat markup to that value.
The good news is that most of these providers aren't actually charging that markup at execution. Once they are live, they price much more tightly, but during indications they are extremely defensive.
The bad news is that on a lot of caps that extra $10k is a drop in the bucket compared to the spike in prices from rates and vol.
With the increase in quoted spreads, auction the cap to multiple providers generally looks more attractive right now than trading direct, even if a bank is quoting an aggressive spread to trade directly. With the pressure of beating out other providers at a live auction, we're seeing many bidders tighten their spreads back down to the $5-10k range at live execution.
Overall Impact
Looking ahead
This Week
With no major data this week, markets will be able to focus exclusively on Iran.