CPI Wednesday. Eases to be pushed further back?
June 9, 2025
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–Higher than expected NFP (+139k) sent yields soaring, with reds leading on SOFR strip, down 15 on the day. Peak SFRZ6 contract is now (Fri) at a price of 9656.5, down from a high print on Thursday of 9683.5, just over a quarter percent from Thusday’s high to Friday’s low. 9640-9650 should be solid support. In treasuries, 5s were up 13.8 bps to 4.126%, while tens rose 11.7 to 4.508%. Twos also up 11.7 bps, to 4.039%, but 5/30 spread declined 5.6 bps to 83.6, having been as high as 98 to end the month of May.
–One year calendars in SOFR had been as inverted as -100, but are now more like -75. At the start of May, SFRM5/M6 was -103, now -75.75 (9567.75/9643.5). FFN5/FFN6 is -78.5 (9567.5/9646). Obviously, easing estimates are being squeezed out. Citi apparently pushed back the timing for an ease from the July FOMC to Sept. There’s almost nothing priced in for a cut at next week’s FOMC: SFRM5 is 9567.5 or 4.325% as is FFN5, while Fed Effective is 4.33% and SOFRRATE has ranged from 4.26 to 4.35 in the past couple of weeks. FFN5/FFQ5 spread settled at a new high of -3.5 (9567.5/9571). The July FOMC is right at month’s end, on the 30th, so this spread is an easy proxy for expected ease at the meeting, 10-15% chance.
–SFRM5/U5 settled -23.5 (9567.75/9585.5) so right around one ease. SFRU5 9587.5^ settled 26.5, also around one-quarter percent.
–3, 10 and 30 year auctions start tomorrow. 30y currently seems comfortable hanging out around 5%. NFIB Small Business Optimism tomorrow, with CPI on Wednesday. China/US talks continue. LA/US talks seem to have broken down.
Breaking Points
June 8, 2025 – Weekly Comment
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Below is a chart of the copper/gold ratio compared to the 10y treasury yield. I had first heard it mentioned by Jeffrey Gundlach of DoubleLine. From 2019 (DoubleLine website)
Broadly speaking, the ratio of copper to gold can serve as an indicator of the market’s appetite for risk assets versus the perceived safety of Treasuries. More specifically, the ratio of copper to gold can serve as a leading indicator of the direction of the yield on the 10-year U.S. Treasury note.
Like a lot of things, that relationship broke in 2022. A rise in copper/gold once signified industrial demand, the backbone of the economy. It’s only about gold now and the cloud over fiat currencies.
In our new economy, the driver is not industrial copper, but rather information technology. So I created a chart with AAPL, AMZN, GOOGL, META, MSFT, NVDA (cap weighted) divided by gold. I excluded TSLA due to its specific political issues. The chart shows the surge from 2020, and the belated catch-up by the Fed and 10y yields. I don’t think there’s enough information to make this chart a useful indicator, but if it does have any predictive power, then this year’s decline in Mag6/gold might point to an economic slowdown and corresponding decline in yields.
In terms of the new economy and AI sweeping away jobs like a failed dam washing away a downstream town, friend TS sent me this link:
https://arstechnica.com/tech-policy/2025/06/openai-confronts-user-panic-over-court-ordered-retention-of-chatgpt-logs/
Late Thursday, OpenAI confronted user panic over a sweeping court order requiring widespread chat log retention—including users’ deleted chats—after moving to appeal the order that allegedly impacts the privacy of hundreds of millions of ChatGPT users globally.
In a statement, OpenAI Chief Operating Officer Brad Lightcap explained that the court order came in a lawsuit with The New York Times and other news organizations, which alleged that deleted chats may contain evidence of users prompting ChatGPT to generate copyrighted news articles.
Of course Large Language Models pirate copyrighted material, and obviously not just from NYT. In my opinion there’s no way around it. Yes, the legal profession is involved.
From an article on the Daily Mail which outlines job destruction wrought by AI (link at bottom):
From a distance, the job market looks relatively buoyant, with unemployment holding steady at 4.2 percent for the third consecutive month, the Labor Department reported on Friday.
But it’s unusually high — close to 6 percent — among recent graduates.
The Federal Reserve Bank of New York recently said job prospects for these workers had ‘deteriorated noticeably.’
Obviously, Friday’s US Employment report sparked a large jump in rates. On the week, the 5y surged 14.5 bps to 4.126% (up 13.8 Friday). Tens rose 9 bps on the week to 4.508% (up 11.7 Friday). SFRZ5 settled 9609 or 3.91%, only about 40 bps lower than the current Fed Effective rate. Previous Friday’s settle was 9619.5. Was the yield rise due to the realization of an economy that just won’t roll over, or is it partially due to other factors, like upcoming supply? I am keeping an open mind, but will highlight a couple of articles:
BBG (6/6/25): Muni Market Sees $20 Billion Supply Week, Biggest Since 2017
Municipalities have been selling debt at a rapid clip…with issuance running about 20% higher than the same period last year. The rush comes as pandemic-era stimulus aid dwindles and inflation drives up the cost of projects.
The market is gearing up for another heavy week of supply next week…$15.7 b calendar would be notched as the 10th largest tax-exempt weekly supply on record.
BBG (6/7/25): Corporate Cash Levels Are Starting to Fall
The biggest companies can distort averages, and by some measures many high-grade companies aren’t looking great. Leverage levels, for example, have been better about 80% of the time over the last two decades, a UBS analysis found.
“The large liquid megacaps have certainly outperformed,” [UBS] Mish said. “Under the hood, there certainly is a little bit more weakness.”
About $25b of US high-grade bond sales are expected in the coming week.
Finally,
June 5 – Financial Times (Ian Smith) For the first time in almost a generation, governments are starting to face resistance from the market when they try to sell long-term debt. ‘It’s a classic supply-and-demand mismatch problem, but on a global scale,’ says Amanda Stitt, a fixed-income specialist at… T Rowe Price. ‘The era of cheap, long-term funding is over, and now governments are jostling in a crowded room of sellers.’”
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News this week:
Tuesday: NFIB Small Biz Optimism (last at 95.8, it has retraced the post-election surge).
3yr auction
Wed: CPI m/m 0.2 and Core 0.3. y/y 2.5 and 2.9 from 2.3 and 2.8
10yr auction
Thursday: Jobless Claims and PPI 0.2 and Core 0.3. Also FED Z.1 Household Net Worth Q1
30yr auction
Friday: UofMich. Joanne Hsu who heads the sentiment survey, was on Thoughtful Money last week:
“We’re seeing worries across multiple dimensions of the economy. Relative to six months ago we have consumers not only worried about business conditions, they’re also worried about their own personal finances…”
TRADE THOUGHTS
Once again huge buying in SFRZ5 9562.5/9537.5ps, now for 1.5 to 1.75, initially bought for 1.125 synthetically. About 50k added on Friday, settled 1.5 vs 9609.0. Needs a hike to play out. As of Friday, 9562.5p has 546k open (3.0s) and 9537.5 has 432k open (1.5s).
Another interesting trade which is more reasonable if one thinks the Fed doesn’t hike, but also doesn’t ease into the end of the year: Buyer of SFRZ5 9587.5/9568.75ps vs same in SFRH6, paying 2.0 (just 8k). These put spreads are 18.75 wide, and the lower strike is right where SFRM5 is trading now (M5 settled 9567.75). If there’s no ease this year, the trade should work nicely as the Dec put spread fills out to 18.75 and the March put spread, with three months of additional time value, would not be worth 18.75. Of course, it works best if the curve just rolls to the same relative positions as Friday: SFRM5 9587.5/9568.75ps settled Friday at 18.5 vs M5 9567.75 and SFRU5 same ps settled 11.75 vs U5 9585.5, so 6.75 spread to spread.
Also of note, some new buys in SFRH6 calls: +35k SFRH6.M6 9862.5c stupid for 6.0, settled 1.75/3.75 or 5.5. Buyer of 20k SFRH6 9800c vs -30k 9900c for 5.5, settled 4.25/1.0 or 5.5 for 2×3. New buyer (just 5k) SFRH6 9700c for 14.0 covered 9631.5 (settled 13.25 vs 9628.5). Disaster hedge.
One last trade: Buyer 12.5k SFRN5, Q5, U5 9575/9593.75/9600/9618.75 c condor strip for 13.0. All have SFRU5 as underlying, which settled 9585.5. Max profit is between middle strikes, so let’s say there’s one ease: Current EFFR is 4.33 and it would go to 4.08 or 9592.0. And then the world freezes at that price!? Instructive to look at the matrix:
SFRU5 9585.5s
JULY AUG SEPT
9575c 12.25 14.50 16.50
9593c 5.00 8.50 10.50
9600c 4.00 7.00 9.00
9618c 2.25 4.50 6.00
CNDR 5.50 3.50 3.00 (sum 12.0)
Above are all just examples of trades that went through expressing differing scenarios. The theme of trade this week in futures was: 1) easing prospects pushed further back on the curve 2) terminal rate pegged a bit higher 3) some bets for an actual hike.
| 5/30/2025 | 6/6/2025 | chg | ||
| UST 2Y | 391.5 | 403.9 | 12.4 | |
| UST 5Y | 398.1 | 412.6 | 14.5 | |
| UST 10Y | 441.8 | 450.8 | 9.0 | wi 451.0 |
| UST 30Y | 493.2 | 496.2 | 3.0 | wi 496.4 |
| GERM 2Y | 177.2 | 187.8 | 10.6 | |
| GERM 10Y | 249.9 | 257.3 | 7.4 | |
| JPN 20Y | 239.7 | 233.0 | -6.7 | |
| CHINA 10Y | 170.0 | 168.9 | -1.1 | |
| SOFR M5/M6 | -91.3 | -75.75 | 15.50 | |
| SOFR M6/M7 | -11.0 | -8.0 | 3.0 | |
| SOFR M7/M8 | 24.0 | 21.0 | -3.0 | |
| EUR | 113.49 | 113.96 | 0.47 | |
| CRUDE (CLQ5) | 59.79 | 63.63 | 3.84 | |
| SPX | 5911.69 | 6000.36 | 88.67 | 1.5% |
| VIX | 18.57 | 16.77 | -1.80 | |
| MOVE | 92.11 | 89.65 | -2.46 | |
Data spasms – NFP today
June 6, 2025
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–In my highschool biology class, we did that little experiment with a dissected frog leg, using a couple of wires off a C battery, touching the ends to the leg and getting a twitch. It’s ALIVE! That’s how the market is trading: a news flash comes out saying the Trump and Xi spoke and it’s like a wire prod into e-minis. Jerked straight up. But it’s still dead money. ES and NQ both with outside days and lower closes after making new highs early.
–So they took it out of CoreWeave (CRWV), last month’s IPO darling (-17% yesterday) and and put it into Circle’s IPO (Circle has to do with stablecoins and digital assets. For the purposes of this note, we’ll just call it a circle jerk).
–Bonds also ran up early as ADP lower than expected. Other data fed into the stagflation theme: Productivity -1.5%, so Unit Labor Costs +6.6% and Jobless Claims 247k, highest since last October. I had seen a news clip that BLS was having trouble with inflation data due to funding cuts, and that accuracy might suffer. Here’s a google AI summary:
Budget cuts and a hiring freeze at the Bureau of Labor Statistics (BLS) are impacting the collection of inflation data, potentially leading to less accurate and reliable Consumer Price Index (CPI) reports. This reduced data collection, particularly the price index, could affect the accuracy of inflation-adjusted Treasury bond interest rates, Social Security cost-of-living adjustments, and other economic indicators.
–Hmm. Ever hear of the Billion Price Project from MIT (2008). Or Truflation? How about scanning the internet for prices? In any case, BLS releases NFP today. which I am sure will be 100% accurate. Expected 125-130k. Unemployment rate expected 4.2%.
–Yields higher yesterday with 5y leading, +5.8 bps to 3.988%. Tens rose 2.8 to 4.391%. On the SOFR strip reds (2nd year) fell 5.625 to an avg 9667 or 3.33% and greens -6.375 to 9657.375 (3.43%). Seemed mostly like a position adjustment day in front of today’s data, which I think will be on the weak side. Failed breakout in copper yesterday (and lower this morning).
–From an MNI summary of market action: …Consumer Staples underperformed: Brown-Forman fell -16.2% after Canada & Europe cut back on Jack Daniels imports do (sic) to tariffs…”
Look, it’s time for Americans to band together:
Sluggish data
June 5, 2025
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Alex Manzara
Thu 6/5/2025 5:19 AM
–Fives, tens and bonds fell nearly 10 bps yesterday, to 3.93%, 4.363 and 4.886. The Fed Effective rate of 4.33% has been a magnet for the 10y yield, and once again the two are nearly equal. SOFR contracts up 8 to 9.5 from SFRH6 to SFRH9. Pretty much a parallel shift to lower rates across the curve. Peak contracts are Z6 and H7, both settling +9 at 9677.5. ADP lower than expected at 37k, ISM Service PMI fell below 50 to 49.9. USU5 settled 113-17 and now prints 113-25; should be strong resistance around 114-04 to 08. Last payroll report on 2-May USU settled 114-18. TYU was 111-08 on 2-May, now 111-04.
From the Beige Book:
Comments about uncertainty delaying hiring were widespread. All Districts described lower labor demand, citing declining hours worked and overtime, hiring pauses, and staff reduction plans. Some Districts reported layoffs in certain sectors, but these layoffs were not pervasive.
Prices have increased at a moderate pace since the previous report. There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few Districts described these expected cost increases as strong, significant, or substantial. All District reports indicated that higher tariff rates were putting upward pressure on costs and prices.
In terms of the Fed’s mandates, labor is now likely more important, but the general picture is somewhat stagflationary.
–Today’s news includes Productivity and Jobless Claims, with the latter expected 240k. Payrolls tomorrow expected 130k.
Hedge against a Fed shift to HIKE?
June 4, 2025
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–Yields up slightly in the front end as JOLTS higher than expected at 7391k. Contributing to a risk-off environment, the asset cap on Wells Fargo was removed, allowing that bank to grow again (regulatory relief across the economy). Also ZH notes that yesterday’s treasury buyback at $10 billion was the largest on record, with $2b coming today in the 10-20 year sector.
–2y yields +1.6 at 3.955%, 10s unch’d at 4.458% and 30s down 1 bp to 4.983%
–SFRM6 and U6 were weakest on SOFR strip at -3.5 (9653 and 9663.5). Further out the strip, losses were smaller; golds were unch’d (5th year out). Option activity was concentrated in SFRZ5 (settled -1.5 at 9615.5). New buyer 60k SFRZ5 9562.5/9537.5ps for 1.125 to 1.375, settled 1.5. Previously, there had been heavy accumulation of Z5 9568.75p for 4 to 5, yesterday settled 3.75 with just over 340k open. Also yesterday, a seller of 24k SFRZ5 9650/9625/9600p tree down to 2 (settled 2.0). Net delta of -0.27 on the tree (equiv of about 6.5k futures sold). SFRM5 options expire a week from Friday and M5 settled 9568.75. Dec puts struck below that price require HIKES.
–News today includes ISM Services expected 52.0 from 51.6. The employment component was 49.0 last. The lowest was 46.2 since 2023. ADP expected 112k. Beige Book in the afternoon.
–Interesting X post:
https://x.com/rcwhalen/status/1929895359775449550
“Nearly a quarter of consumers using buy now, pay later loans finance groceries, up from 14 percent a year ago, according to a recent LendingTree survey. And it’s not just groceries; more Americans are using these loans to pay for recurring monthly bills, such as electricity, heat, internet and streaming services like Hulu.”
I would say the REAL growth will come when Klarna and Affirm allow BNPL for 0DTE options. Why not? At least there’s a CHANCE of upside, certainly relative to the spicy burrito that was delivered at midnight.
–Another news item: Meta inked a deal with Constellation for nuclear power to run Meta’s AI data center needs. At one end of the spectrum, the massive potential of AI requires nuclear power plants. At the other, Klarna and Affirm tout AI as an input to manage transactions. So, there are massive investments in nuclear technology which end up supporting something as inherently stupid as BNPL. Absurd.
Cover your ass
June 3, 2025
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–June SOFR options expire a week from Friday. SFRM5 has traded 9571 to 9567 since middle of May, settling Monday at 9568.75. Yesterday, otm calls were bought: 20k M5 9600c for 0.5, 30k 9631.25c for 0.25 and 35k 9662.5c for 0.25. Also a buyer of 30k SFRN5 9675c for 1.25 (SFRU5 settled 9590.5. It’s likely that Ukraine’s attacks on Russian airfields convinced some to cover tail risks. The base case is still articulated by Dallas Fed’s Logan: the Fed can afford to wait given the current data. But the base case doesn’t account for outliers.
–Eurozone inflation now below the 2% target at 1.9%. This morning June euribor is 9801 or 1.99%, essentially equal to inflation. ERU5 is 9816.5. By contrast Friday’s US PCE yoy Price Index was 2.1% and Core 2.5%, a midpoint of 2.3%. SFRM5 is 200 bps higher at 4.31%. SFRU5 is 4.10%.
–Of course, potential inflationary effects of tariffs still loom.
–5/30 treasury spread made a new high just under 98 bps. 5y yield +3.3 at 4.014% and 30y +6.1 at 4.993%. Long-end of US curve continues to trade under a haze of suspicion. 5/30 low this year is 34.5 bps in Feb. Low associated with Regional Bank problems in March 2023 is -46. High in early 2021 was 163 of course at that time 5’s were around 75 bps.
–Today’s news: Factory Orders, Durables, JOLTS. The latter expected 7100 vs 7192 last. Low of this cycle has been 7103 in Sept of last year.
Russia and Waller
June 2, 2025
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–I tend to think that Ukraine’s attack on Russia’s airfields and bombers is massive news. I believe there’s true uncertainty about responses going forward. I also think Nawrocki winning the Polish presidency is important, signaling a shift away from Brussels. I understand the bid in gold and oil, but am less certain as to why equities remain relatively strong. GCQ +55.6 at 3371, CLN5 +2.13 at 62.02, ESM -38 at 5878. The press seems to be ignoring possible secondary effects.
–Volatile stocks. SFRZ5/Z6 -56.5. low -59 this week. New buyer 23k SFRZ5 9700/9800cs for 5.0/5.25 (5.25s).
–Excerpts from Waller’s speech yesterday:
I will focus my comments on two issues: first, the effects of tariffs on inflation persistence, and second, the divergence of household inflation expectations and financial market measures of inflation expectations.
He outlines differences between small and large tariff outcomes (large could lead to both inflation and unemployment reaching 5%, but the inflation would be temporary).
The smaller-tariff scenario assumed a 10 percent average tariff on goods imports would remain in place but that higher country and sector specific tariffs would be negotiated down over time. In this case, inflation may rise to 3 percent on an annualized basis and then dissipate. Growth in output and employment would slow, with the unemployment rate rising but probably not as high as 5 percent.
As of today, I see downside risks to economic activity and employment and upside risks to inflation in the second half of 2025, but how these risks evolve is strongly tied to how trade policy evolves.
Thinking about the rest of 2025 and 2026, I expect the largest factor driving inflation will be tariffs. As I said earlier, whatever the size of the tariffs, I expect the effects on inflation to be temporary, and most apparent in the second half of 2025. This will be determined not only by the ultimate size of the increase, but also by how exporters and importers respond, something that is highly uncertain.
Inflation turned out to be much more persistent than we thought it would be. Am I playing with fire by taking this position again? It sure looks like it. So why do I believe a tariff-induced inflation spike will not be persistent this time?
The University of Michigan’s Surveys of Consumers show that both near- and longer-term inflation expectations have increased strikingly, on net, in the past few months and currently stand at 6.6 percent and 4.2 percent respectively. Meanwhile, inflation expectation measures based on prices of nominal versus inflation-adjusted securities have not increased very much, with 2-year Treasury Inflation-Protected Securities inflation compensation around 2.7 percent and 5-year and 10-year around 2.4 percent. Also, the median from the Survey of Professional Forecasters for consumer price inflation 6 to 10 years ahead is at 2.2 percent.
Concluding:
Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2 percent goal, and that the labor market remains solid, I would be supporting “good news” rate cuts later this year.
Liquidity trap of another sort
June 1, 2025 – Weekly comment
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Private Capital:
Dan Rasmussen of Verdad Capital wrote a piece for the Financial Times (31-May): ‘Is private equity becoming a money trap?’ Succinct and informative, it dovetails with a short Bill Ackman interview (below). The takeaway is that many of the private companies rely on debt, and are cash-flow negative; there is little chance of a graceful exit for those who have over-allocated in this area.
By my estimate, the addressable market for private equity — the companies it could buy — is only about one-tenth the size of the public equity market. Yet a 40 per cent allocation to privates, roughly where Yale’s endowment is, has become increasingly commonplace. This represents a massive overallocation to a very illiquid asset class.
Ackman says the same thing about Harvard: About 80-85% of the stated $53 billion endowment is in [illiquid] private equity, real estate and venture capital funds. He estimates that a sale of private equity would entail a discount of about 40% of carrying value, but importantly notes in his X post, “I am told by an expert I highly respect in this space that my 40% discount is much too high and a 7-15% discount is a better estimate.” In any case, the implication is that rather than selling into an unwelcoming market, Harvard is borrowing, with $7.9 billion of debt.
Larry Fink of BlackRock was WAY out in front (March 31, 2025). From a BBG article:
The world’s largest asset manager now sees part of its purpose as “unlocking private markets,” said Fink, whose firm has committed almost $30 billion in the past year to acquisitions in that area.
In his letter, Fink said the traditional 60/40 portfolio of stocks and bonds may no longer be sufficient for diversification. Instead, Fink said the new normal for portfolios may be 50/30/20, with 20% of investments being in private assets such as real estate, private credit and infrastructure.
Sounds an awful lot like Bernie Madoff sucking the last hapless investors into his Ponzi.
The question is, “If problems reach critical mass in private equity/credit, are those markets large enough to cause serious repercussions across asset classes?” Rasmussen says private equity is about one-tenth the size of public markets. A google search puts that percentage slightly lower.
Jamie Dimon said two weeks ago: “I am not a buyer of credit today. I think credit today is a bad risk.” From a couple of days ago, “You are going to see a crack in the bond market. It is going to happen.” “If you look at economic history, bad things happen. Tectonic plates shift; very hard to see in real time. It is shifting…I just don’t know if there’s going to be a crisis in six months or in six years. I’m hoping that we change the trajectory of the debt…”
Concerns about private equity/credit are one area to monitor. Gov’t finances are another. Many large players have warned about excessive complacency, Dimon being the most recent (in a more macroeconomic sense).
Perhaps a bigger concern should be (down)shifts in the labor market due to AI and robotics.
Business Insider is cutting 21% of employees in part due to AI. One small example. Erik at YourWeekendReading (@erik_ywr) notes in his last missive that Jensen Huang (CEO of NVDA) gave a keynote address on May 19 at Computex in Taiwan. “It was probably the most important speech in the entire financial services industry. It explained everything. It laid out the roadmap for where we are going, and yet no one mentioned it.”
It’s a long presentation, here’s a link:
https://www.youtube.com/watch?v=TLzna9__DnI&t=2846s
At around the 42 minute mark, Huang talks about the Stargate ‘AI factory’. 4 million square feet in Abilene TX. Costing $60 to $80 billion; the computing parts are $40-$50 billion.
The speech is a celebration of advances and computing fabrication prowess in Taiwan. Calling it impressive is an understatement. Around the 1:20 mark the speech covers robotics.
The AI/ robotics revolution will likely entail painful adjustments in employment across many industries. (Payrolls Friday expected 125k from 177k last).
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On the week yields fell, with 5s, 10s and 30’s down 9.3 to 10.5 bps (3.981%, 4.418% and 4.932%). On the SOFR strip greens were the leader, with SFRU7, Z7 and H8 all +11.0 (9665, 9658.5, 9652.5). The peak contract is still SFRZ6 at 9676, up 7.5 on the week. Implied vol was down across rates. MOVE index -8.8 to 92.11 and VIX fell 3.7 to 18.57.
In context to Dimon’s warning about market ‘cracks’: The spring of 2023 is when SVB failed: the regional banking blow-up. 30y yield had reached 3.99 in early March, fell to 3.45 in early April as the crisis unfolded, but then shot up to the high of 5.115% by October as the Fed continued to hike. From July to October the yield rose about 125 bps. I would place that move in the ‘crack’ category. In the October 2023 Quarterly Refunding, Yellen addressed that crack by shifting issuance to bills. From the October 2023 high of 5.115%, the 30y yield fell to 3.95% by the end of December. So when Bessent says the Treasury has a large toolkit to address bond market volatility, I think that means there’s a cap on bond yields at around 5.5%, or at least I hope so.
In the July-August 2024 yen-carry episode, the 30y bond yield was 4.54% on July 24, but sank to 3.93% by mid-September. By mid-January of this year it was 4.97%. On the initial tariff scare in April, the 30y yield was 4.70% on March 27, but fell to 4.41% just after the Liberation day announcement. Now 4.93%. My takeaway is that ‘crisis’ episodes can lead to fairly dramatic long-bond yield declines in the short term, but the trend going into and coming out of the election is marked by higher lows and higher highs. Might a continued move to higher yields precipitate a wrenching adjustment in private equity/lending? Bessent will be tested.
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News this week:
Waller speaks tonight
Monday: ISM Mfg. Since late 2022, only above 50 in two months, Jan & Feb 2025 at 50.9 and 50.3
also on Monday: Powell speech at Board of Govs Internat’l Finance Conference
Tuesday: Factory Orders/ Durables, JOLTS. At 7.192m last, it’s near 2018/19 levels.
Wed: ADP & ISM Services. Watch employment, 49.0 in April and 46.2 in March. BEIGE BOOK
Thursday: Trade and Jobless Claims (Kugler, Harker, Schmid)
Friday: Payrolls expected 125k from 177k. Rate 4.2% vs 4.2 last.
TRADE THOUGHTS
Near one-year SOFR calendar spreads have imploded this year. SFRM5/M6 was -1.5 bp on Jan 10, low settle on April 30 was -110, now -91.25 as we go into June roll. SFRU5/U6 was +6 on Jan 13, settled Friday at -79.0. Low settle for the move was last week at -80.5. SFRZ5/Z6 was +11 on Jan 14. Friday’s settle -56.5. Low settle on Tuesday was -59.0. (9619.5/9676.0). These declines have occurred as expectations for easing have been pushed further back along the calendar. It’s somewhat surprising that on January 27 (the high settle in Jan) SFRZ5 was 9613.5. At that point the Dec contract was 11 months forward. On Friday SFRZ5 settled just 6.0 bps higher at 9619.5, now a six-month forward contract. In between, the high tick associated with Liberation Day was 9709.5. The current price of 9619.5 is 3.805% almost exactly 50 bps lower than the current Fed Effective rate of 4.33%. Two eases.
| 5/23/2025 | 5/30/2025 | chg | ||
| UST 2Y | 397.1 | 391.5 | -5.6 | |
| UST 5Y | 407.4 | 398.1 | -9.3 | |
| UST 10Y | 451.1 | 441.8 | -9.3 | |
| UST 30Y | 503.7 | 493.2 | -10.5 | |
| GERM 2Y | 176.4 | 177.2 | 0.8 | |
| GERM 10Y | 256.8 | 249.9 | -6.9 | |
| JPN 20Y | 252.8 | 239.7 | -13.1 | |
| CHINA 10Y | 169.6 | 170.0 | 0.4 | |
| SOFR M5/M6 | -86.5 | -91.25 | -4.75 | |
| SOFR M6/M7 | -6.5 | -11.0 | -4.5 | |
| SOFR M7/M8 | 24.5 | 24.0 | -0.5 | |
| EUR | 113.65 | 113.49 | -0.16 | |
| CRUDE (CLN5) | 61.53 | 60.79 | -0.74 | |
| SPX | 5802.82 | 5911.69 | 108.87 | 1.9% |
| VIX | 22.29 | 18.57 | -3.72 | |
| MOVE | 100.91 | 92.11 | -8.80 | |
May draws to a close
May 30, 2025
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–Thursday featured outside day ranges and closes near extremes. For example, TU, FV, TY, US, WN all made new lows early in the session (relative to Wednesday) and closed near the highs. Cash tens eased 5.2 bps to 4.425% and 30s fell 5.1 to 4.924%, having been back above 5% early yesterday morning. In eleven sessions starting 14-May TYU5 has 7 lows between 109-12+ to 109-26. Low settle is 109-16. Large support area. A close below 109-16 would be bearish.
–Stock index futures also posted outside days on large ranges but still closed positive.
–SOFR strip featured slight steepening from reds back. Reds +6, Greens +5.375, Blues +4.5, Golds +3.625.
–On May 15 ERIS swap futures had a banner day, with block buys of 50k 5y swaps and 62k 10y (YIWM25 and YIYM25). Yesterday these positions were exited on blocks.
https://erisfutures.com/volumeopeninterest
–Financial press is focused on Section 899 in the tax bill:
(RTRS) The U.S. House of Representatives has approved a sweeping tax and spending bill that includes the possibility of imposing a progressive tax burden of up to 20% on foreign investors’ passive income, such as dividends and royalties.
Obviously the implication is less foreign demand for US assets, contributing to pressure in US stocks.
–News today includes PCE inflation data:
m/m expected 0.1% from 0 last, with Core also 0.1 from 0. Yoy expected 2.2% from 2.3% and Core 2.5% from 2.6%
Throw caution to the winds
May 29, 2025
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–Court voids Trump’s tariffs. Tariffs provide tax revenue. US is running a huge deficit. Stocks soar. Isn’t it as easy as just hitting the bid in bonds?
–Here’s a clip from the FOMC minutes:
Significant uncertainties also surrounded changes in fiscal, regulatory, and immigration policies and their economic effects. Taken together, participants saw the uncertainty about their economic outlooks as unusually elevated. Overall, participants judged that downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases.
–Yields rose yesterday with 10s up 4.5 bps to 4.777% and 30s +3.7 to 4.975%. Oct 2023 high yield in 30s was 5.115%. This morning 30y yield is back above 5% at 5.025% ref USU5 111-07 and WNU5 114-10. Five year auction yesterday went fine with a yield of 4.071%. Seven year today. News includes Q1 GDP revision and Jobless Claims, expected 230k.
–Buyer yesterday of 35k SFRM5 9568.0. Settled there with OI +74k to 1.468m. Total open int in SOFR is 11.3 million, Since 2023 total SOFR OI has ranged sideways between 9.5m and 11.4m, with large drops at each expiration, followed by a climb back towards highs. No growth, though I am not counting options. I guess there’s no need to hedge any new risk. Peak on the SOFR strip is Z6 at 9668.5. SFRU6, Z6, H7, M7 are with 5.5 bps, 9663 to 9668.5 or around 3.375%. Terminal has ranged from about 2.75 to 3.25%.
