Forward yields dropping
April 29, 2025
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–Steeper curve with 2s dropping 7.7 bps to 3.685%, fully 5/8% lower than the current EFFR. Tens only down 4.6 to 4.22%; 2/10 at 53.5. The strongest SOFR contract is also the peak contract, SFRU6 now at 9698.5, just over 3%. Near SOFR one-year calendars made new lows, with U5/U6 down 8 to -104.5 (9629/9698.5) and Z5/Z6 down 4.5 (9660.5/9696.5).
–QRA is muddled by the debt ceiling, appears to indicate lower borrowing needs by the Treasury than feared, perhaps a contributor to yesterday’s rally. Of course, Dallas Fed Mfg is yet another soft indicator which plunged to -35.8, only lower during the covid spike.
–Large trade yesterday was a roll, selling (exit) 0QU6 9750/9800cs to buy the the same in 0QZ, paying 2 to buy extra time. Did ~35k as a roll and sold extra 0QU6. Also a new buyer of 50k SFRZ5 9568.75p for 4.0 (settled 3.75 ref 9660.5).
–In the heart of earnings, with MSFT and META tomorrow and AAPL, AMZN Thursday. Today’s news includes JOLTS expected 7500k from 7568 last, Consumer Confidence expected 88.0 vs 92.9 last and Dallas Fed Services.
Slow start to the week
April 28, 2025
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–Treasuries ended the week at the highs, with cash 10s down 3.7 bps on Friday to 4.266%. From Feb 25 to March 27, TYM5 settlements were between 110-135 and 111-105. Then we had early April turbulence, and since April 14 the settlement range has been 110-245 to Friday’s high 111-165. Outside of tariff announcements the treasury market has been stable with a bias toward lower yields.
–The most inverted one-yr SOFR calendar is June’25/June’26 at -95.5. The lowest contract (SFRM5) to the peak contract (SFRU5) is nearly the same at -99 (9588.5/9687.5). New recent lows posted in SFRU5/U6 at -61.5 (9626/9687.5) and SFRZ5/Z6 at -31.5 (9654/9685.5). The Fed is showing little enthusiasm for near term easing while peak contracts (a year from now) tend to target the 3% area.
–It’s a big week for economic releases in front of next Wednesday’s FOMC. Dallas Fed Mfg today. JOLTS Tuesday. Wednesday should be interesting with Q1 GDP, ECI and PCE prices. Payrolls on Friday. Rarely does the Fed deviate from market pricing in front of a meeting, and FF contracts are pretty much locked down for no change. FFK5 settled 9569.5 vs current EFFR of 4.33% or 9567.0. However, if data prints weak, there’s still a chance for a last minute pivot.
CHARTS
April 27, 2025 – Weekly comment
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(this one appears long, but is mostly pictures)
A few charts to see how things have been progressing in 2025: First, VIX and MOVE. Both had serious spikes associated with initial tariff announcements. Both have reverted to more normal levels, at least what I would consider ‘normal’ in the Trump era of disruption.
(The spike in treasury vol in October was associated with the election).
Next, SPX in white, 10y treasury yield in blue, and Dollar Index in green. This week stocks rebounded, nearing the Liberation Day announcement. SPX is right around the 50% retrace from this year’s all-time-high in February, to the early April low. The 10y yield is at February levels, and appears to be trending lower. Dollar index remains pressured. (This chart is ytd, a shorter time frame than others).
Note that on the week, SPX jumped 4.6%, but yields globally were little changed. The US 10y fell 6.1 bps to 4.266% (now a bit under both SOFR and EFFR at 4.30% and 4.33%) while the German Bund ended at 2.47%, same as last week, though well off the March high of 2.897%. 10y JGB is 1.338% even though Tokyo CPI was released last week at +3.5% yoy. BOJ meeting next week, expected to leave target rate at 0.5% and to downgrade growth forecasts.
Now let’s look at commodities. BCOM (purple) looks ‘normal’. A lot of volatility this year but around mid-range. Oil (amber) which is a large component of BCOM is at new lows, and has barely recovered since early April. Gold has powered higher, though it had a pullback this week.
A friend asked me on Friday (paraphrasing), “What if the Trump plan ends up working out? What if, by year’s end, expectations for domestic investment and growth are rebounding? Low energy prices now create forward price increases (inflation) forcing the Fed into tightening?” The thought was that deferred SOFR calendar spreads might rapidly start to move more aggressively positive.
Steepening of forward spreads typically occurs when the central bank is in an easing posture. (because lower rates increase inflation and growth prospects). As an example, the ECB has cut rates in seven steps since last June, from 4% to 2.25%. On June 3, 2024, ERH6/ERH7 was -16.5 (9727.5/9744.0). On April 9 the spread reached +28.5 and is now +24.0 (9834.5/9810.5). From 6/3/24 to 4/25/25 ERH6 rallied 107 and H7 lagged, up 66.5. That’s how it usually works.
Now consider SFRH6/H7. On June 3 it was -19.5, right around the Euribor spread. Right after September’s initial 50 bp cut it reached +14.0. Pretty much according to script. However, since the high on Sept 24, the spread has traded a wide, back and forth range, down to -12.5 in December, up to +12.5 just before inauguration day, and now -8.0. SFRH6 from 6/3/24 to 4/25/25 rallied 72.5, 9600.5 to 9673.0. SFRH7 +61 from 9620 to 9681.
The broad idea here is that Trump’s plan relies on low energy prices (check) low bond yields (check) stabilized equity values (maybe) and perhaps a weaker dollar (check). The outcome COULD be that the Fed only grudgingly eases short term rates, but forward rates start to really jump, and it happens sooner rather than later, taking something like SFRH6/H7 to significant new highs. (Bear steepener). Anyway, that’s the scenario we contemplated in a search for a low cost, high possible reward trade. In my opinion low odds, but most definitely NOT zero.
One last thought and chart related to news this week. There’s a lot coming out: JOLTS on Tuesday, Q1 first estimate GDP on Wed, along with Employment Cost Index and PCE price data, ISM Mfg on Thursday and Payrolls on Friday.
I just want to focus on Wednesday: GDP and inflation. BBG estimate for Advance GDP is 0.4%. However, the Atlanta Fed GDP Now is -2.5% (gold adjusted -0.4%). PCE prices are expected yoy 2.2% from 2.5% last, with Core 2.6% from 2.8%. Pretty close to target.
Consider the following graph.
In white in NOMINAL GDP. The only time this fell below zero is GFC and Covid. In red is yoy PCE prices. The bottom panel is the spread, a proxy for real GDP. When it really feels economically crappy is when nominal GDP goes negative. Doesn’t happen very often, and that’s why the Fed has an inflation target. Keep the nominal dollars circulating, and even if there’s significant inflation, debts are being serviced. Now, just imagine that Atlanta GDP is correct, and REAL GDP is -2.5. If PCE prices are right at +2.5%, that means nominal GDP is zero.
The above scenario would most likely lead to a bull steepener as opposed to a bear steepener as discussed above.
We’re an economy of nominal flows, not stock (wealth). That’s why it’s seductive to run real rates negative, hopefully to encourage a nominal rate of growth above funding rates even if the outcome ends up being inflationary. It’s becoming easier to describe current short end rates as being restrictive, and perhaps it’s not a stretch to argue that negative real rates are imperative for the Federal Gov’t to inflate away onerous debt.
| 4/17/2025 | 4/25/2025 | chg | ||
| UST 2Y | 377.7 | 376.2 | -1.5 | |
| UST 5Y | 393.8 | 388.5 | -5.3 | |
| UST 10Y | 432.7 | 426.6 | -6.1 | |
| UST 30Y | 480.6 | 473.6 | -7.0 | |
| GERM 2Y | 168.6 | 171.9 | 3.3 | |
| GERM 10Y | 247.2 | 247.0 | -0.2 | |
| JPN 20Y | 223.6 | 222.4 | -1.2 | |
| CHINA 10Y | 165.4 | 166.1 | 0.7 | |
| SOFR M5/M6 | -90.5 | -95.5 | -5.0 | |
| SOFR M6/M7 | 10.5 | 9.0 | -1.5 | |
| SOFR M7/M8 | 25.0 | 23.5 | -1.5 | |
| EUR | 113.85 | 113.62 | -0.23 | |
| CRUDE (CLM5) | 64.01 | 63.02 | -0.99 | |
| SPX | 5282.70 | 5525.21 | 242.51 | 4.6% |
| VIX | 29.65 | 24.84 | -4.81 | |
| MOVE | 114.64 | 105.79 | -8.85 | |
When does hard data catch-down?
April 25, 2025
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–Yields fell Thursday with 10s down 8 bps to 4.303% (close to EFFR of 4.33%). Seven year auction was solid. Cleveland Fed President Hammack said in an interview that the Fed could ease in June “if we have clear and convincing data”. June FOMC is the 18th, 7.5 weeks away. Later in the session Waller said he could support an ease if tariffs cause unemployment to rise (more likely in second half). The market has embraced the ‘wait-and-see’ approach, with SFRM5 up only 1.5 bps to 9587.5 and SFRU6 (the peak contract on the strip) at 9684.0, up 9.0 on the day. The red pack (M6, U6. Z6, H7) settled 9680.875 (+8.75), consistent with a FF target range of 3.0 to 3.25%.
–Large midcurve SOFR trade: -100k 0QM5 9681.25/9700cs vs +100k 0QU5 9700/9725cs for 1.0 to 1.25. Settles: SFRM6 9680.5, cs settled 7.0. SFRU6 9684.0, cs settled 8.25. This was a roll, exiting the June to buy Sept, again reflecting the idea of a slow-play Fed. If the trade were a package, it would work best with SFRM6 expiring just under the lower call strike of 9681.25 (essentially where it is now) and SFRM6/U6 calendar spread declining a bit, that is, SFRU6 rallying.
–Overall activity was quiet, but there were a few SFRM5 call spreads I’ll mention. First, +10k SFRM5 9600/9631.25c 1×2 for 0.75. Settled 7.0 and 3.25 so 0.5. If hard data crumbles and easing is moved forward this is a good trade. On Wednesday we get Q1 GDP and PCE prices, and on Friday NFP (expected 130k). Also, a buyer of 37.5k SFRM5 9656.25/9681.25cs for 0.75. Settled 2.25/1.50, looks like a short was rolled to higher strike. SFRM5 options have 50 days until expiration, and 9681.25, nearly 100 bps otm are still 1.5!
The Trump Whisperer
April 23, 2025
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–Is Bessent getting Trump to modify his most strident pronouncements? All of a sudden some softening on removing Powell and on China tariffs, leading to an unwind of Monday’s price action. The curve flattened, stocks jumped, gold reversed.
–In rates, the 2yr note rose 5 bps to 3.802% (old 2y) and the 30y fell 4 bps to 4.874%. On the SOFR strip, reds were -7.25 to 9681.125, greens -2.375 to 9658.375, blues -0.25 to 9633 and golds +1.125 to 9608.625. ESM5 settled +130 to 5314 and up another 109 this morning to 5423. GCM5 which had rallied $500/oz since April 9, from below 3000 to 3500, is now seeing profit-taking, printing 3340 this morning.
–Exit seller of 60k SFRM5 9575/9600cs at 9.5 to 9.25. Settled 9.25 ref M5 at 9590.5. Exit trade, giving up on a Powell ease.
–I’ve seen several articles like this one on BBG today: ‘Yale signals private equity may have peaked’. The music has stopped and now endowments need to unload private equity and credit. To who?
–Today’s news includes S&P PMIs and Beige Book, along with 5y auction. I believe the Chicago Fed is preparing this issue of the Beige Book. This release could have added significance in case the anecdotal evidence cites softening of conditions.
Similarities 2007 and now
April 22, 2025
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–On April 14, it was announced that RJ O’Brien would be acquired by StoneX (SNEX). It’s not the first time RJO was sold.
In 2007, Spectrum Equity Investors and Technology Crossover Ventures bought a majority stake in RJ O’Brien & Associates. I found an old article which notes the deal from May 28, 2007
A press release from Dec 13, 2010 (prnewswire.com) reported that the family bought back majority control in late 2010, about 3.5 years later.
In mid-2007 the FF target was 5.25%. Within 1.5 years, by the end of 2008, the target was zero. Clearing firms make a lot of money on positive carry of client funds, and the fall in interest revenue was a factor in the diminished the value of the company. Last week StoneX announced the acquisition. The current midpoint of the FF target range is 4.375%; the high was 5.375% just prior to the first ease in September of last year. It’s also worth mentioning where CPI was during these periods.
In 2006, the high CPI print was 4.5%. But by October 2006 it was down to 1.3%, when it again began to climb. Similar to recent action. By mid-2007, CPI was 2.4 to 2.5%, but in October it printed 2%. The first Fed cut of the GFC was in September 2008 (just as the first ease of this cycle was Sept). As the Fed was easing, CPI shot higher. By July 2008 it printed a high of 5.6%.
Those among us who think the Fed CAN’T EASE because of high inflation prints would do well to recall this period.
–Wild steepening yesterday, with 2/10 up 12.5 bps to 65.9 and 5/30 up 8 bps to 95.0. I’ve included a chart of 5/30. On the SOFR strip the red pack (2nd year forward) was +7.0 to an avg price of 9688.375 while golds (5th yr forward) were -7.625 to avg price of 9607.5. Even deferred 3 month calendar spreads are at surprising levels. For example, SFRM9 settled 9617.5 and the next contract, U9, settled 9610.5. A spread of 7 that far forward is elevated. I am NOT suggesting it’s a sale, just noting that the steepener trade is a bulldozer. As every headline blares, gold is also making new highs with a sizzling gain ytd of ~ 30%. The new world order will likely embrace monetization of gov’t debts. Gold and the curve reflect that.
–TSLA reports today. 2y auction. Philly Fed Services (-32.5 last).
–Here’s an article that helps explain the difference between average and median:
From the comments: ‘The average American is a millionaire. The median American is holding up a “please help” sign at a stoplight’.
Easter Monday
April 21, 2025
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–News this morning: Pope Francis has died. Gold is making new all-time highs as the dollar slides to a new low. DXY current 98.10 (low in Jan 2021 89.21). Curve is making new recent highs with 2/10 now 59.5 (I marked at 53.3 on Thursday’s futures settle; high in Jan 2021 was 158), and 5/30 now 93 (marked at 87.1 on Thusday; high in Feb 2021 was 163). GCM5 now above 3400, last at 3405, up ~ $77/oz.
–Thursday featured a sharp steepener with the 2y +3.2 bps to 3.935%, and 30’s up 6.1 bps to 4.806%. Current 30y 4.846%, so up 4 bps. This morning’s price action being attributed to Trump’s attacks on Powell. Equities slipping with ESM5 5257.00, -56.75. I saw a fair amount of commentary over the weekend suggesting stocks are unlikely to test recent lows. Perhaps a bit too complacent.
–Interesting link:
https://www.visualcapitalist.com/americas-19-trillion-consumer-economy-in-one-chart/
The Devil’s Triangle
April 19, 2025 – Weekly Comment
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On Sept 1, 2000 SPX closed 1521, testing the all-time-high earlier in the year of 1527 in March. Fed Funds were 6.5%. By April 3, SPX had declined 27% to 1107. Nasdaq fared much worse: from Sept 1, 2000 to April 3, 2001, it was crushed …down 66%. Starting at the turn of the year, the Fed aggressively cut in a series of 50 bps, right in the beginning of Jan ‘01, then Jan 30 and March 19. (At the time of the first cut, Nasdaq 100 had already dropped over 50% from the March 2000 peak, but SPX was down less than 20%). Fed funds were now 5%. I was on the trading floor working for Refco, and there were no rules against trading your own account. I was long a bunch of April calls on the June’01 contract, which expired worthless on April 12. Easter was April 15. I had thought the Fed would ease again, as Nasdaq was imploding, but I got the timing wrong. The bulk of my position had expired worthless, but I had a few calls further out on the curve as well.
The next week I was on the phone with Mike Spencer, an upstairs broker in NY. He was buying clips of the September contract, a couple of hundred at a time. It was a slow morning, and he said, “Sorry to keep the line open, I’m not sure if this guy is done yet.” I said, “No problem, I’m here as long as you like. We’re not busy.” The next thing Spence said, in a completely normal but slightly surprised voice is, “The Fed just cut.” Click, line was dead. I flashed an order into the June contract to buy 20 lots. It was very quiet and Julie, one of Donny Lanphere’s clerks, just gave me a bored look and started to turn into the pit. At the top of my lungs I screamed “BUY ‘EM”. I was probably 35 to 40 feet away from the pit as the Refco booth was at the top tier; I think there were three or four levels descending to the pit level. One or two seconds elapsed from the time Spence said ‘cut’ to my yell. But in the next second the floor absolutely erupted. If you’ve ever been on a trading floor when nothing is going on, and the phone rings, it’s kind of loud. Within seconds every light on our phone pads were blinking like a Christmas tree, but the sound of the rings was overwhelmed by the roar of the pits. The floor was physically shaking. Think of the biggest play in the biggest sporting event you’ve ever attended and that’s the volume. I think the June contract was instantly up 30 or 40 bps, and even though I was on two phones and buried, I remember thinking, this is either going to be a very good day or a disaster. I had entered my order at the market. If I was filled +30, there was no recourse. I wasn’t. When the cards (fills) came back to the desk over the next hour or so, my price was exactly where we had been.
When you tell a story, have a POINT, right? In the grand scheme of things the above tale is small potatoes. I didn’t have a lot of money in my account where I could have done 100 contracts. However, it was the only time I was ever first. I didn’t know if the news I heard was true in that split second but there was no hesitation. Just reflex. The second reason I mention it is because the time of year is the same, and I believe underlying conditions are similar. Emergency ease? No. But I maintain that odds of ease in the near term are much higher than the market is pricing.
When Trump fires Powell, I am going to hit a bond bid. But I am not going to be first. And I am confident bonds will be crushed. So, this now all takes a bit of strategizing. Safe to buy bond puts before the fact? Even though vols sharply compressed this week premium is still expensive. What if it doesn’t happen? What if it does and stocks crash too, sparking a bond reversal? Probably need to scale in delta hedges. How likely is it that Powell is actually removed? The May FOMC is two and a half weeks away. If there’s no ease, Trump will be apoplectic. If there is a cut, bonds will still sell off, at least temporarily.
I’ve been expecting an ease at the May FOMC. But now that Trump has publicly ratcheted up pressure on Powell, I don’t think it will occur, even though financial conditions have tightened rapidly. Economic uncertainty is obviously increasing. The inflationary impact of tariffs is going to be meaningless if the economy tanks.
When I was in college, I took a class about Keynes’ theories from Robert Eisner, a famous economist. I don’t remember a lot from my studies, but a couple of things from that class stuck with me. Here’s what (I think) I learned: Inventories don’t necessarily equal intended inventories. That’s it. At the time, classical economists would argue that excess production/unsold inventories would lead to price cuts, employment would fall, but interest rates would fall as well, to a level that would encourage new activity. It was all a self-correcting mechanism. Keynes identified a possible problem: a liquidity trap, where lower rates wouldn’t generate new activity. Keynes realized there could be a self-perpetuating negative feedback loop. This was where a temporary increase in gov’t spending came in, to stop the doom loop. Now we hear ‘Keynes’ and the negative connotation is simply that more gov’t spending fixes everything. That wasn’t the original thought.
The next idea is, I believe, attributed to Milton Friedman: When considering an economic decline, first, the problem needs to be identified. Then, plans to address the shortfall need to be considered. Then policies are implemented. Each step necessarily entails lags. By the time action is taken, the original issue has likely run its course, and the policies now create new problems. A non-discretionary model is therefore the best solution.
Another concept that is, perhaps, most applicable to today is John Mauldin’s ‘fingers of sand’ paper. A scientist computer-simulated sand hills, randomly dropping one grain of sand at a time on different parts of the pile. He found that internal ‘fingers of instability’ would become buried in the pile, but there was no way to model which grain of sand would ultimately cause the collapse. The only clear thing was, the bigger the sandpile, the more likely one of the fingers would buckle, causing destruction. And, there are always unstable fault lines under the surface.
I had seen Charlie Rose interview Lloyd Blankfein, where the latter said Goldman’s real strength is risk management: Considering the probability of many scenarios before the fact, identifying which was most likely, and therefore being ready when one or another started to play out.
To tie this up: First, I still think we’re close to the last grains of sand which could create severe instability. It’s hard to get the timing right, as my worthless calls story at the top of the page attests, but it’s essential to game the possibilities. Second, in terms of unintended inventories, one might now say that’s impossible given instant knowledge of demand, supply chains, etc. How can physical inventories get out of hand in the aggregate? But that’s not where we are anymore. In my opinion, inventories are huge projects costing billions of dollars. Intellectual capital. The uncertainty regarding tariffs, the downward trend in global trade, the pullback (at the margin) of gov’t support…all of these things figure into the ‘inventories’ equation (for me, anyway). I THINK I know that fiscal support is eroding. I think the Fed will ease more aggressively to try to mitigate the uncertainty. But Powell now seems to be leaning more toward Friedman. ‘We’ll ease further when the model (hard date) tells us. We’re not going to be super-discretionary and take our cues from the plunging anecdotal data like the Philly Fed and confidence surveys. The two variables of unemployment and inflation haven’t come together for us yet.’ It always used to be that the Fed said we’ll adjust policy proactively, otherwise we’ll be behind the curve. That has always been the Fed’s defense AGAINST a rules-based policy. I believe Powell is leaning towards rules now as a shield against Trump’s attacks.
There’s one other famous economist (apart from Trump) that I’ll mention: Recep Tayyip Erdogan. He had thought it was a good idea to replace his central banker with his son-in-law. Or maybe that was the finance minister. Barely matters. He’s changed the central bank chief several times. From 2020: Erdogan has called for rate cuts, refuting established economic theory that high rates can rein in inflation. Last weekend he described interest and exchange rates and inflation as the “devil’s triangle”. The lira continues to spiral down the nine layers of hell.
The Devil’s Triangle. I love that. It’s a LOT better than the Mundell-Fleming Trilemma (or impossible trinity). “Look, it’s the DEVIL. We’ve got to try some new stuff.”
Beige Book Wednesday. Twos, fives and sevens auctioned starting Tuesday.
Q1 GDP advance on April 30. Payrolls May 2. FOMC May 7.
| 4/11/2025 | 4/17/2025 | chg | ||
| UST 2Y | 395.0 | 379.4 | -15.6 | wi 377.7 |
| UST 5Y | 416.0 | 393.5 | -22.5 | wi 393.8 |
| UST 10Y | 448.0 | 432.7 | -15.3 | |
| UST 30Y | 487.0 | 480.6 | -6.4 | |
| GERM 2Y | 178.9 | 168.6 | -10.3 | |
| GERM 10Y | 257.0 | 247.2 | -9.8 | |
| JPN 20Y | 232.8 | 223.6 | -9.2 | |
| CHINA 10Y | 166.4 | 165.4 | -1.0 | |
| SOFR M5/M6 | -64.5 | -90.5 | -26.0 | |
| SOFR M6/M7 | 13.5 | 10.5 | -3.0 | |
| SOFR M7/M8 | 23.5 | 25.0 | 1.5 | |
| EUR | 113.55 | 113.85 | 0.30 | |
| CRUDE (CLM5) | 60.90 | 64.01 | 3.11 | |
| SPX | 5363.36 | 5282.70 | -80.66 | -1.5% |
| VIX | 37.56 | 29.65 | -7.91 | |
| MOVE | 137.26 | 114.64 | -22.62 | |
Stretching it out
April 17, 2025
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–Not now…later. That’s the markets interpretation of Fed policy, and it didn’t change after Powell’s comments yesterday. For example, SFRM5/SFRM6 one-year calendar settled down 6.5 bps at a new low close of -87.5 (M5 9592.5, unch’d and M6 9680.0, +6.5). Just over three months ago on Jan 13 it settled nearly positive at -1.5. In another example, FFN5 settled 9588.0 down 1 on the day. But FFX5 settled 9641.5, +2.5. Current EFFR is 4.33 or 9567. FFN5 encompasses both the May and June FOMCs, but there’s not even one full 25 bp ease being priced. That’s just stupid. November, FFX5, is a ‘clean’ month with no meetings. The July 30, Sept 17 and Oct 29 FOMC meetings precede the contract and it’s 9641.5 or 3.585%, just 74.5 bps below the current EFFR. Anyway, the eases are being gently pushed forward in time.
–Stocks, which were already lower on the day, reacted negatively to Powell. SPX down 2.4% and Nasdaq Comp down a bit over 3%.
–A quote from MNI:
Powell says “I do think we’ll be moving away from” the dual mandate goals “probably for the balance of this year. Or at least not making any progress, and then we’ll resume that progress as we can.” He repeats that “the tariffs are larger than than forecasters had expected, certainly larger than we expected, even in our upside case.”
–Of course, a BBG headline this morning blares: Trump says Powell’s termination ‘Cannot Come Fast Enough’. In my opinion, an ease is, or will shortly be, justified. The market thinks so as well. But Trump is likely pushing it even farther out.
–From new NY Fed Business Leaders Survey
(responses collected between April 2 and 9)
“The business climate index dropped nine points to -60.7, its lowest level in more than four years, suggesting the business climate was considerably worse than normal.”
–Just an update on Corn priced in gold. If the world used REAL money we’re in severe deflation.
https://www.newyorkfed.org/survey/business_leaders/bls_overview
It’s a bull market in moral hazard (gold)
April 16, 2025
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–I was away from work for the past week, near Mount Hood, Oregon for a wedding. Also visited N. California and Eugene and Portland, OR. Beautiful country, but in Eugene, Oregon and in Portland, the drug and homeless problem is overt. I would say that what struck me at the wedding festivities that I hadn’t really noticed previously, is that several of the younger people talked about job cuts and were concerned about their own continued employment. It’s like the Ronald Reagan quote: “Recession is when your neighbor loses his job. Depression is when you lose yours. And recovery is when Jimmy Carter loses his.” In any case, I believe we’re in recession now. I don’t care what the big banks are saying about recession odds. Look around.
–During the few days I was gone, ranges were absolutely staggering. For example, from April 7 high prints to April 14 lows, SFRM6 = 75 bps 9726 to 9651. SFRZ6 also 75 bps, 9726.5 to 9651.5. SFRZ7 9705.5 to 9627.0 or 78.5 bps. When the Fed is ‘in play’ typically the 4th, 5th and 6th quarterlies are most volatile on the SOFR strip. But there were obviously large ranges further back as well (SFRM6 is 5th slot). Yesterday I marked 10s at a yield of 4.321%, right on top of the current 4.33% Fed Effective rate and SOFR setting from April 14 (also 4.33%).
–I loosely watch FV to US DV01 spread vs the vol spread. Currently futures DV01 are 43.30 (per $100k contract) and 127.50 or a ratio of 2.94. The vols for June, 5.31 in FV and 14.64 for US, ratio of 2.75. Typically the vol ratio is much lower relative to DV01 ratio (more like 0.80 vs 0.94 now) which intuitively makes sense; the 5y area is more volatile and sensitive to Fed moves. Currently it feels like US vol is too high on a relative basis, but that makes some sense as well, as the market is worried about inflation and concerned the Treasury might run into some difficulties placing long-term debt.
–None of this discussion is intended to be a specific trade recommendation, but when I marked settles in SOFR midcurves, I saw that nominal straddle levels of reds are higher than that of greens and blues. No big deal, it’s usually that way. However, I’m not sure if it SHOULD be that way in the current environment. As an example, 0QZ5 9675^ settled 84.0 ref Z6 9675.0s. 2QZ5 9650^ settled 77.5 ref Z7 9651.0s. Again, no specific trade, but given that US vol seems high, I would think that nominal levels of green midcurves are a bit too low on a relative basis. As mentioned above, the range was actually a bit larger in SFRZ7 than SFRZ6 last week.
–Powell speaks today on the outlook at the Economics Club of Chicago at 1:30 EST. I can’t help but think some covert liquidity operations/promises occurred recently to steady the markets. Supposedly a treasury basis trade blow-up but open interest in FV and TY down less than 5% from highs to lows in April. It’s a bull market in moral hazard, which necessarily translates to new highs in gold. GCM5 up $82 this morning at a new high 3323.
