Stimmies
November 10, 2025
*********************
–Gov’t is close to re-opening. Trump’s $2000 tariff dividend and idea-float of the 50-yr mortgage teeters towards desperation (in my opinion), but stocks love all of it. Bonds, not so much.
–The odds of a rate cut in December should decline significantly if the administration is fueling new stimulus. That idea would work to flatten the curve, but inflationary aspects might undermine the long-end even more. On Friday tens ended unch’d at 4.091%. 30y was +1.4 at 4.699%. This morning 10s are up 4 bps at 4.13 and 30s are up 3 at 4.728%. The 2y is currently 3.595 vs 3.555 on Friday, so thus far it’s sort of a parallel shift to higher rates. 3-year auction today, moved up due to the Veteran’s Day holiday tomorrow. Tens and Thirties are Wednesday and Thursday.
–Friday’s Financial Stability Report was somewhat leery of extended asset valuation levels. FT headline: ‘Robinhood wants to allow amateur traders to invest in AI start-ups’. I heard a podcast with Jeff Gundlach, who made an example of Harvard, which had to tap debt markets for operating cash when donor and gov’t money flows declined, because private equity investments have no liquidity at carried valuations. He extended the thought to Private Equity ETF’s, a classic time mismatch offering daily liquidity on investments that are on the opposite end of the liquidity spectrum.
–First major snow in the Chicago area today. Off to shovel the driveway!
The Third Mandate
November 9, 2025 – Weekly Comment
*****************************************
In Friday’s missive I referenced the Fed’s ‘dual mandates’ inflation and employment. I added, “The dark horse is what some used to refer to as the Fed’s third mandate, financial stability.”
On Friday the Fed released its most recent Financial Stability Report. It’s a real page-turner. I’ll summarize a couple of themes below. But first I’ll note another interesting item from Friday which was Fed Governor Stephen Miran’s speech on Stablecoins and the GENIUS Act. Here is the link:
https://www.federalreserve.gov/newsevents/speech/miran20251107a.htm
The key point is that stablecoins could strongly increase demand for US dollars and short-term treasury securities globally, potentially lowering US yields. Two quotes:
However, because GENIUS Act payment stablecoins do not offer yield and are not backed by federal deposit insurance, I see little prospect of funds broadly fleeing the domestic banking system.
In 2024, work by Marina Azzimonti and Vincenzo Quadrini estimated that if stablecoins are in widespread use and fully backed by U.S. securities, it could put as much as 40 basis points of downward pressure on interest rates.
FINANCIAL STABILITY REPORT
https://www.federalreserve.gov/publications/files/financial-stability-report-20251107.pdf
The Fed lists an overview of four vulnerabilities:
1) Asset valuations
2) Borrowing by businesses and Households
3) Leverage in the financial sector
4) Funding risks
Next time someone says the Fed really doesn’t know what they’re doing, read this 73 page report. I am not going to attempt to summarize this entire document. However, I am including tables of the
‘Most cited potential shocks over the next 12 to 18 months’ (from Spring of 2025 and Fall of 2025)
The Fed is concerned about asset valuations and ratios. It’s not worried about total business and household debt (relative to GDP they are near 20 year lows). However, debt paying capacity of smaller businesses is on the radar. Fed is monitoring high Hedge Fund and Insurance Co leverage.
The Financial Stability Report is released in Spring and Fall. Notable changes: In the latest survey, POLICY UNCERTAINTY and GEOPOLITICAL RISKS are cited as top risks. The first went up to 61% of respondents being concerned, from 50% in Spring. Geopol Risks went up to 48% from 23% in Spring. HIGHER LONG-TERM RATES and INFLATION round out the top 4 risks. Note that the Fed can’t do anything about the US and world political situation, it can only respond to actual crises. In my opinion, this report corroborates Friday’s U of M Consumer Sentiment, the worst on record outside of mid-2022 when the Fed was aggressively hiking. The latest survey at 50.3 is well below 1980 and the GFC. General malaise related to political uncertainty and elevated price levels.
Every shock is related of course. But in the latest Fall 2025 report, two things are mentioned near the top that were absent in Spring. HIGHER LONG-TERM RATES were in the 4th position (in spring ‘treasury market functioning’ was in the 6th position). ARTIFICIAL INTELLIGENCE was not mentioned in the Spring report but is in the 5th slot in Fall.
From the report: “A large volume of CRE debt is scheduled to mature over the coming year, and forced sales, were they to occur, would put downward pressure on CRE prices.” This line captured my attention as juxtaposed against this headline from Sunday’s WSJ: ‘JP Morgan Chase’s Soaring Skyscraper With Human Spirit’. From google AI:
The “Skyscraper Index” is a concept suggesting that a new tallest building is often completed just before an economic downturn, as it can symbolize a period of excessive optimism and malinvestment.
Oftentimes, the word ‘hubris’ is linked to these symbols of economic prowess.
There is a section on AI and Algo Trading. Further down: ‘Vulnerabilities associated with financial leverage remained notable.’
Below are tables from the report, but there are many more charts and data discussions included in the link. The big, specific, looming risk is the Supreme Court’s ruling on tariffs, which has the potential to reverberate through the system.
OTHER THOUGHTS/ TRADES
Big trade of the week is a new buy of 135k TYF6 113.5c covered delta neutral:
+35k 0’27 vs 112-145
+50k 0’30 vs 112-180, 32d
+50k 0’32 vs 112-205, 33d
Straddle levels 1’57 to 1’55. On Friday, atm TYF6 113^ settled 1’42 and 113.5^ settled 1’50
These trades are similar to covered call buys done in late September (see chart)
The CME’s credit products haven’t gotten much traction. Since September, HYBZ5 has traded in a range from ~730 to 740. This contract settles to BBG US Corp High Yield Very Liquid Index (LHVLTRUU <index> ). Contract size $150 * index. There’s not much open interest, just 2400 contracts. However, I think it’s worth watching as a reasonable risk/reward short in case of a stock market blow-up. In late March, the June contract was 700 but traded below 670 in early April.
https://www.cmegroup.com/markets/interest-rates/credit.html
| 10/31/2025 | 11/7/2025 | chg | ||
| UST 2Y | 360.6 | 355.5 | -5.1 | |
| UST 5Y | 371.5 | 367.9 | -3.6 | |
| UST 10Y | 409.9 | 409.1 | -0.8 | wi 410.4 |
| UST 30Y | 466.9 | 469.9 | 3.0 | wi 469.9 |
| GERM 2Y | 196.5 | 198.7 | 2.2 | |
| GERM 10Y | 263.2 | 266.5 | 3.3 | |
| JPN 20Y | 259.2 | 261.5 | 2.3 | |
| CHINA 10Y | 179.3 | 180.5 | 1.2 | |
| SOFR Z5/Z6 | -65.5 | -66.0 | -0.5 | |
| SOFR Z6/Z7 | 7.5 | 7.5 | 0.0 | |
| SOFR Z7/Z8 | 19.0 | 19.5 | 0.5 | |
| EUR | 115.37 | 115.66 | 0.29 | |
| CRUDE (CLZ5) | 60.98 | 59.75 | -1.23 | |
| SPX | 6840.20 | 6728.80 | -111.40 | -1.6% |
| VIX | 17.44 | 19.08 | 1.64 | |
| MOVE | 66.61 | 74.41 | 7.80 | |
Genuine Risk
November 7, 2025
*******************
–Good rally in rate futures which more than erased Wednesday’s losses. 10y yield fell 6.8 bps to 4.089% with TYZ5 112-265s. In SOFR, reds thru golds up 8 to 8.5. Peak contract SFRH7 is 9792, up 8 on the day. SOFR rate settling Wed was just 3.91%, only 4 bps above the Fed Effective rate of 3.87%. The great repo panic has ended. The reasons for the rally include a huge jump in Challenger layoffs: “Employers announced 153,074 cuts last month, compared to 55,597 cuts in October 2024. Last month’s figure was “the highest total for October in over 20 years, and the highest total for a single month in the fourth quarter since 2008.” Weakness in AI/tech stocks contributed to a fixed-income bid, with SPX -1.1% and Nasdaq Comp -1.9%.
–Williams is the latest to acknowledge the Fed will need to begin expanding its balance sheet for liquidity purposes. The inflation side of the Fed’s mandate gained some traction yesterday. Chicago Fed’s Goolsbee “…said a lack of inflation data during the government shutdown makes him more uneasy about continuing interest-rate cuts.” Cleveland’s Hammack said she’s more concerned about inflation than jobs. The dark horse is what some used to refer to as the Fed’s third mandate, financial stability. When that filly spins out of the turn and accelerates on the outside, the rest of the field is left in the dust. Sort of like the second filly to win the Kentucky Derby, Genuine Risk, in 1980. Bonus on link: Howard Cosell introducing the race.
–Trade of the day was a new buyer of 135k TYF6 113.5 calls covered, which settled 34 vs TYH6 112-24 (1’52 in the straddle). TYF6 113.5c added 131k in open interest. In futures, TU added 62k positions, FV 58k and TY 45k. The gain in TY OI is esssentially equal to the 32 delta used on the 113.5c.
Details:
+35k cov 112-145, paid 27
+50k cov 112-18, 32d, paid 30
+50k cov 112-205, 33d, paid 32.
This is likely the same guy who initiated the same strategy in late September, buying 113, 113.5 and 114 calls covered.
–I love seeing clips like one on BBG this morning: “Bernstein sees Prediction Markets Propelling Robinhood, Coinbase” HOOD was down 10.8% yesterday. Not sure “propelled” is the right word….
Volfgang Twins (grab a dance partner)
November 6, 2025
*******************
–Tough day for rate futures. ADP solid at 42k, expected 30k. ISM Services stronger than expected 52.4 vs 50.8 exp. Treasury announced plans to keep auction coupon sizes as they currently are for next few quarters; the market had looked for more bill issuance to alleviate potential pressure on long-end yields.
In terms of issuance, the Committee recommended keeping nominal coupon sizes as well as TIPS issuance unchanged. The Committee discussed potential changes to coupon issuance in the future, and the timing thereof. Given the uncertainty of potential financing needs, the Committee was mixed on how Treasury should approach adjustments to its current forward guidance.
–Rate futures ended at the bottom of the range of the past two months. Ten year yield +7 bps at 4.157 with TYZ5 112-105. On the SOFR strip all contracts from U26 through golds (5th year out) were -6 to -6.5. Peak contract SFRH7 settled 9684.0 or 3.16% which is just 70 bps lower than the current Fed Effective of 3.87%. So that’s only around three 25 bp cuts, with Miran still calling for easing increments of 50 bps. Miran has at least one fan: new buyer late in the day of 20k SFRH6 9662.5/9681.25cs 2.75 (settled there ref 9639). There continues to be an appetite for these small otm call spreads, but the huge long in SFRZ5 9650/9662.5cs is currently underwater, as it settled 0.25 vs SFRZ5 9622.0.
–Everything one needs to know about the US economy is contained in the top two stories on Zerohedge today. Headlines: OpenAI CFO Seeks US Gov’t backing, Disappointed Market Doesn’t Have More AI “Exuberance” and Deutsche Bank Reportedly Starts Shorting AI Stocks to Hedge Data-Center Funding Risks.
In the first article, Sam Altman is all about the share value. When asked how a company with $13b in revenue can handle $1.4t in commitments, he says revenue is growing, etc, but also says there are plenty of buyers for OpenAI shares. Translation: We’re doing great things. Others believe in the magic, you should too. DB: It might be magical, but just in case it’s fantasy, we’ll hedge it.
Everyone knows the amounts of capex are staggering, and I suppose being in the middle of the extraordinary wealth driven by valuations makes it all seem like a perpetual motion machine. As Cem Karsan often says, “the liquidity is created by the market itself”. It makes the DB headline seem eminently sensible. They can’t ALL win, so we better have some puts on this stuff, since we know we’re not getting repaid by everyone. One would think NVDA head Jensen Huang saying “China is going to win the AI race” would cast a sobering cloud over this party, but the music is still playing.
The problem, well maybe it’s not a problem for everyone, is that the music is Icelandic Heavy metal. Sans chairs.
–I was going to mention a couple of things about the Fed’s Consumer Debt and Credit report, but we all know there’s a lot of unpaid student debt. It’s all irrelevant if the AI infrastructure implodes.
Buy one, sell the other
November 5, 2025
********************
–Yields eased slightly as risk was re-priced. SPX down 1.2%, Nasdaq Comp -2.0%. Bitcoin hit 125k exactly one month ago, and dipped below 100k yesterday, for a nice
round 20% ‘correction’. Ten year yield fell 1.8 bps to 4.087%. Twos thru thirties down 1.6 to 2 bps. Same with the SOFR strip, all contracts out five years were +1 to +2, with SFRH6 and SFRM6 the strongest at +2.0 (9643.5 and 9666.5). A lot of ‘wealth’ has evaporated.
–SERX5 settled at exactly 4% or 9600 (+1.0). The Fed’s standing repo facility was tapped than $5 billion yesterday vs $50b at month-end. The great repo panic has abated for now.
–Somewhat interesting? SFRM6 and SFRU8 settled at exactly the same price, 9666.5. Which one should we buy, and which to sell? I can easily make the argument either way. Just looking at curve roll, the same spread three months forward is SFRH6 to SFRM8, with prices of 9643.5 and 9671. So the front spread rolls down 23 bps and the deferred 3-m spread rolls up 4.5 bps. So the spread moves to -27.5; picks up about 9 bps per month. Simple, right?
I’m not sure who said this first, but a friend mentioned it to me years ago, “THE ROAD TO HELL IS PAVED WITH POSITIVE CARRY”
Obviously the reason SFRM6 is so much higher than H6 is due to easing expectations. Powell’s term ends in May, one might expect a new chair to aggressively ease. Perhaps SFRM6 is cheap with a rate of 3.335%. Why not closer to 3%? And IF easing does end up being enthusiastic, might not inflation expectations soar? In which case, SFRM8/U8 might move up from +4.5 to something like +12.
…you better take your diamond ring, you better pawn it babe
November 4, 2025
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–Not a lot to talk about regarding price action in rates yesterday, but this morning the story is equity index weakness post Palantir’s results yesterday afternoon. Current ESZ -75 at 6888 and NQZ -369 at 25374 (down 1.4%). [I don’t know if this is necessary or not in today’s compliance world, but I do happen to be long some PLTR puts]
–Since we’re in a world financed by repo, I thought I would start with charts inspired by friend RC, who mentioned a couple of pawn shop stocks. EZPW (EZ pawn) is up 50% ytd. FCFS (FirstCash Holdings) is up 55% ytd. It’s a good business, and I doubt they’re borrowing to invest in AI data centers. “In Philadelphia, it’s worth fifty bucks.” [I couldn’t help myself]
–In the US repo rates are still under pressure; I am just watching SERX5/FFX5 spread as a reflection, which settled at a new low -13.0. FFX5 (Nov Fed Funds) settled 9612 while one-month SOFR settled 9599. So the SER contract settled over 4%, or above the Standing Repo 4%. A friend mentioned that FFX seems a bit cheap given the 3.86 EFFR setting on Friday which covered the first three days of the Nov FF contract. I think between morning and afternoon ops, repo facility usage yesterday was only around $22b.
https://www.newyorkfed.org/markets/desk-operations/repo
–TBAC estimates for quarterly borrowing were released yesterday afternoon. “During the October–December 2025 quarter, Treasury expects to borrow $569 billion in privately-held net marketable debt, assuming an end-of-December cash balance of $850 billion.[2] The borrowing estimate is $21 billion lower than announced in July 2025…”
I also skimmed the related Economic Summary, but the conclusion must have been written by someone shamelessly lobbying to be next Fed Chair or a related office:
“Thus far in President Trump’s second term, the Administration has successfully stewarded major fiscal legislation to prevent a historic tax increase, and it continues to seek further cuts to federal spending and incentivize productive business investment. Ongoing trade negotiations are transforming trade relationships, which will put American citizens first and prevent other countries from taking advantage of the openness of our economy.” Sort of made the previous recap worthless. C’mon, TBAC.
–I don’t follow crypto much, but friend JW alerted me to new hack related a key ethereum mainnet. From Yahoo Finance:
“DeFi protocol Balancer suffered a major breach on Monday, affecting Balancer V2 Composable Stable Pools. Total losses across multiple chains reached over $128 million, per PeckShieldAlert.”
Apparently some of the funds have already been recovered and the total amount is relatively small, but it’s perhaps a small cloud relating to stablecoins, etc.
–Composition of debt issuance released on Wednesday at 8:30 EST. From BBG: “[Dealers] also see officials repeating language from July that they’ll hold sales of nominal interest-bearing securities steady “for at least the next several quarters.” Next week’s auctions expected $125b: $58b 3s, $42b 10s, $25b 30s. Here come the t-bills…
–PLTR ended the day at 207.18. Immediately after results were posted, it made a new all-time high just shy of 218. Current pre-market 192. Quite bearish considering earnings were expected 17 cents and actually came in at 21 cents, more than double last quarter’s 0.10. Big enough to cause broader profit taking? The market cap is a bit less than $500b, which seems modest relative to the tech giants but still worth more than 10% of the entire Russell 2k mkt cap.
–Tens ended yesterday at 4.105%, up 0.6 bp. SOFR strip +1 to -1 bps out five years. New low in treasury vol. TYF6 112.5^ settled 1’37 or 4.6. That stops TODAY!
NFP zero in a growing economy?
November 3, 2025
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–Little change in rates Friday. Continued buying of 0QZ5 9700/9725cs which settled 4.75 vs SFRZ6 9688.0 (total position ~80k, paid 4 to 5). This morning Z6 prints 9690.5. It was just under 9700 when Powell said that a cut in December was “not a forgone conclusion”. High print in mid-Oct was 9717. Ten-yr yield ended 4.099%, +0.6 bp.
–This morning SERX5 (1-month SOFR) as of 5:30am EST is 9600 offer, or 4%, the same rate as the Fed’s Standing Repo.
From Lorie Logan’s speech Friday:
“I currently view the average spread of TGCR [tri-party general collateral rate] to IORB as the central, though certainly not only, indicator of how reserve supply needs to evolve.”
–Today’s news includes ISM Mfg, estimated at 49.5 from 49.1 last.
–Another interesting note from Lorie Logan’s speech on Friday (Dallas Fed President). She would have preferred to keep rates steady at the last meeting. “My staff estimates that break-even payroll growth, the number of net new jobs needed to hold unemployment steady, has fallen to around 30,000 jobs per month. ”
The Market Huddle podcast featured Marvin Barth as a guest, and his estimate for b/e payroll growth would have been similar at around 30k, but he added a rather interesting point: He mentioned “solo-preneurs”, people that have broken out of the establishment and have small businesses working for themselves. He puts this cohort as 15-16% of the workforce, and says they aren’t captured by NFP because they aren’t a part of the establishment survey. He mentions Uber drivers, but adds surprisingly, that many of these people are quite high earners (revenues over $1m) and are growing strongly. I suppose podcasters and Only Fans are in this category. (41 minute mark). Because of this group, he says NFP at ZERO can keep actual unemployment steady.
https://www.youtube.com/watch?v=t5dH3vWGxIM&t=4608s
Diligence
November 2, 2025 – Weekly Comment
*****************************************
The theme that kept striking me this week is due diligence. The Tricolor and First Brands bankruptcies seem like they could have been sidestepped if someone had just checked under the hood, so to speak. (See, that’s funny, because those businesses were related to autos, which used to have engines under the hood, but now just have delinquent debts and drained batteries). Below are a couple of notes that restore faith in diligence, but perhaps only at the fringe.
A BBG piece highlights Dominic Ball, a 26-yr-old analyst at Rothschild & Co Redburn, as the ‘Lone Bear on Fiserv’ (only analyst with a sell signal; stock dropped 44% last week, “wiping out some $30 billion in market capitalization.”) I watched an interview with this guy and he was low-key and thoughtful, and said the company he works with is great because they encourage analysts to do deep dives. “There was a big dichotomy between what was happening on the ground, when we speak to merchants and retailers, versus what the investor base thought was happening.” [said Ball]
Another example from X, noted by @HeroDividend:
There is a Wells Fargo analyst who ordered the same burrito bowl 75 times at eight different Chipotles in NYC to prove the portion size inconsistency $CMG [I’d like to think he did that on foot]
My favorite old report was the guy who would inspect corn fields in person, laying a half-shucked ear down on the ground next to a pack of Marlboros to display quality and size, documented with a photo, taken no doubt with a Kodak Instamatic.
Counter to these anecdotes is a new item on ZeroHedge: “The private-credit arm of BlackRock Inc. and other lenders are racing to recover hundreds of millions of dollars after falling victim to what they’ve described as a ‘breathtaking’ fraud – the latest sign of weakness in an opaque corner of the U.S. debt markets.” This story says Blackrock’s HPS Investment Partners wrote off $150 million after allegedly finding falsified collateral. Small potatoes, but the outlines are becoming a recurring theme…sniffing around on the ground versus reviewing the numbers from 30,000 feet. The problem – and we’re in it now at the highest levels – is that the guys in the jets ignore those that are seeing and hearing it with their own eyes and ears. It’s only ‘breathtaking’ when the unwind hits. Sort of mirrors ‘anecdotal vs hard’ data analysis.
On a Monetary Matters podcast (Jack Farley), Joseph Wang @FedGuy12 outlines issues related to the Fed’s balance sheet (summarized in his link below). He also mentions that commercial banks are increasingly cutting back direct C&I (Commercial and Industrial loans) and instead lending to shadow banks/private credit operations, who in turn directly lend to companies. I was surprised that he deemed this trend as less risky for the banking system, because unexpected losses would be a layer away from banks. I think that’s a questionable assumption, but only time will tell how it plays out as more private credit losses pile up due to ‘fraud’. One might think that AI could help quickly discover collateral that has been pledged to more than one lender. Then again, AI could also easily re-create false docs.
https://fedguy.com/balance-sheet-dominance/
In any case, the other theme of the week was the Fed meeting and implications for the balance sheet and markets. Joseph Wang’s piece suggests that massive deficits necessarily lead to the Fed not only ending QT (which it did) but again increasing its balance sheet. “A steady expansion of the Fed’s balance sheet is the most likely way to meet the growing financing demands of the Treasury.” This is likely to occur both through enlarged usage of its standing Repo facility and by buying t-bills. I’ve seen several commentators opine that t-bill purchases by the Fed aren’t really QE and are more of a cash management function.
The famous part of the Fed meeting last Wednesday is when Powell said a rate cute in December is “not a foregone conclusion”. (Curve immediately flattened as front-end easing bets were exited). But the other interesting note is that Powell said the Fed’s balance sheet should begin to resemble the Federal Government’s maturity profile, which means less Fed holdings at the long end and more in t-bills, bringing the Fed’s average weighted maturity closer to the outstanding stock of treasuries.
On the Market Huddle podcast, guest Marvin Barth said the Fed is moving towards a corridor system for reserve management, with the bounds essentially defined by the floor of the Reverse Repo facility rate, 3.75% as of Thursday, and the cap at the Standing Overnight Repo rate of 4.00%. Interest paid on reserve balances is now 3.90%. The Fed’s Discount Rate is 4%. As of Friday, the spread between SERX5 (Nov one-month SOFR) and FFX5 ended at the low of the move, -11.5 bps, from -4.5 bps in the beginning of September. Settles were 9600.5 and 9612.0. That is, the one-month SOFR contract is essentially at the upper bound, which indicates perception of tight reserves. There is no FOMC in November, and at 9612.0, the FF contract is 3.88% vs Fed Effective setting of 3.87% on Thursday. The actual SOFRRATE Thursday was 4.04%, a spread of 17 to EFFR.
Barth’s interview was quite enlightening, but one tidbit that I’ve tucked away is that he says the US 10/30 treasury spread is a good proxy for term premium (which he thinks should be going up). From February through August this spread was in an upward trend, 20 to 70 bps. Since Sept 2 it has generally fallen, now at 57 (4.10/4.67). I don’t have a particular bias on this trade, though I think spreads like 2/10 and 2/30 should be steepening, even though Powell is warning the easing cycle may be nearing its end. I look at a couple of market signals below, but I just want to return for a second to the upcoming ‘QE or NOT QE’ question.
My initial thought regarding a resumption of QE was that when it was originally implemented, the market reaction, (paradoxically) was that bond rates tended to go UP, not down, but STOCKS went up. So, if QE is around the corner, it might not be particularly beneficial in terms of lowering bond and mortgage rates. However, if it’s just t-bill purchases, (QE that’s NOT QE), perhaps bond weakness will be exacerbated, and perhaps stocks will see zero benefit. Clearly the market isn’t expecting much of a reaction at all: the MOVE (implied volatility index for treasuries) made a new low for the year this past week at 65.75 and ended Friday at 66.61. High in April was 140. VIX firmed slightly on the week from 16.37 to 17.44 even as SPX rose marginally.
In terms of a terminal rate for Fed Funds, I have noted several times that the Red SOFR pack (second year forward, average price) seems to have a hard time getting through 9700 or 3% (blue line) throughout the tightening and easing cycles. I’ve also observed that the 10y yield has seemed to gravitate to the Fed Effective rate over the past several months. My conclusion was that reds would see a shift up towards 9750 as perceptions of a rate cut cycle remained intact, and that the 10y would move to 3.85-3.88%. I am still holding onto that thesis, though market signals since Wednesday’s FOMC are less encouraging. Below is a chart of the red pack YIELD and the FF midpt.
Could we be getting closer to the terminal rate, which appears from the red pack to be around 3%? The current FF midpoint is 3.875% and the red pack settled 96.87625 or around 3.125%.
Though there were a lot of exit trades Thursday and Friday as Powell poured cold water on future cuts (with Logan saying she would have preferred, like Schmid, no cut), there was a new buyer of about 80k 0QZ5 9700/9725 call spreads for 4.0 to 5.0 bps. 0QZ options have SFRZ6 as underlying, 9688s, and expire into the contract on 12-December 2025, six weeks from now. Call spread settled 4.75 (7.0/2.25). While renewed expectations of an ease in December would be a tailwind for the trade, the main driver should be perceptions of forward easing, which could be encouraged by weaker employment data and/or more credit problems.
| 10/24/2025 | 10/31/2025 | chg | ||
| UST 2Y | 347.5 | 360.6 | 13.1 | |
| UST 5Y | 360.7 | 371.5 | 10.8 | |
| UST 10Y | 400.1 | 409.9 | 9.8 | |
| UST 30Y | 458.8 | 466.9 | 8.1 | |
| GERM 2Y | 196.6 | 196.5 | -0.1 | |
| GERM 10Y | 262.5 | 263.2 | 0.7 | |
| JPN 20Y | 259.4 | 259.2 | -0.2 | |
| CHINA 10Y | 184.5 | 179.3 | -5.2 | |
| SOFR Z5/Z6 | -64.5 | -65.5 | -1.0 | |
| SOFR Z6/Z7 | 11.0 | 7.5 | -3.5 | |
| SOFR Z7/Z8 | 20.0 | 19.0 | -1.0 | |
| EUR | 116.27 | 115.37 | -0.90 | |
| CRUDE (CLZ5) | 61.50 | 60.98 | -0.52 | |
| SPX | 6791.69 | 6840.20 | 48.51 | 0.7% |
| VIX | 16.37 | 17.44 | 1.07 | |
| MOVE | 68.94 | 66.61 | -2.33 | |
https://www.federalreserve.gov/newsevents/pressreleases/monetary20251029a1.htm
back of the cocktail napkin figuring…
October 31, 2025
******************
–Continued follow-thru pressure on rate futures from Powell’s comments Wednesday that an ease in Dec is not a forgone conclusion. Weakest SOFR contracts were down 4: both SFRH6 at 9642 and the peak SFRH7 at 9689. On 17-Oct SFRH7 traded as high as 9717.0 or 2.83%. As of yesterday, this peak SOFR contract is 3.11%. Many option trades appear to have been predicated on a Fed Fund ‘terminal rate’ closer to 2%, but longer term resistance seems to have capped reds at or just under 3%. Two-yr yield rose 3 bps to 3.61% and tens up 4 bps to 4.093%. With Wednesday’s cut there’s significant positive carry in 10s. My thesis has been that EFFR (Fed Funds Effective Rate) recently acted as a magnet for the 10y yield, new EFFR should be 3.87. Open interest fell in TU, FV and TY futures with the latter -61k, suggesting long liquidation.
–Notable new trade that’s fading the weakness: buyer of 75k 0QZ5 9700/9725cs for 4.75 to 5.0. Settled 4.5 vs 9687.5 in SFRZ6. Expires 12-Dec. Even if the Fed does NOT ease at the 10-Dec FOMC, this trade could play out. With NO ease, SFRZ5 would probably gravitate around 9612. Prior to option expiration in September 2025, the SFRU5/SFRU6 one-year calendar was slightly below -100. If the same type of price action developed, that would mean SFRZ6 above the 9700 strike.
–An exit trade in midcurves: -50k 2QH6 9800/9825cs at 0.25. Seems worth owning just in case…can’t go sub-zero! Stocks were sloppy yesterday but seemed to resolve to the downside, however, AAPL and AMZN posted great results and have taken ESZ higher this morning.
–I haven’t been following this, but with gold becoming the lynchpin of the new world order, I thought I’d check the one-year GC spread. GCZ5 4015.90s, GCZ6 4195.60s a spread of 179.70 or 4.5% for the year. Seems reasonable to cover interest insurance and storage. Mason jars for the back yard, though have to feed the dog for a year to keep out intruders. He’s good at it
Miran neutralized
October 30, 2025
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–Fed cut 25 as expected, but Powell made it a point to note that the outcome of the DECEMBER FOMC is far from a foregone conclusion in terms of a further ease. Markets immediately took the cue and front end was whacked. FFF6, for example, plunged from 9639 to 9631 (settle 31.5). QT to end in December. Markets had been fully anticipating another 25 bp cut in Dec, or possibly more. EFFR yesterday was 4.12 or 9588, so a cut of 25 plus 25 in Dec would be 9638. With a settle of 9631.5 (-7.5) in FFF6, odds of a Dec cut were shaved to around 70%. Obviously, selling was concentrated in near contracts. SFRZ5 fell 9 bps to 9627. SFRH6 was weakest, -11.5 to 9646. One-month SOFR to FF spreads remain pegged at lows: SERX5/FFX5 -10.5 (9601/9611.5) SERZ5/FFZ5 -11.0 (9613/9624). These spreads indicate a continued tight reserve situation which could easily worsen before December.
SFRH6 9646.0 -11.5 (and 2y note jumped ~9 bps to 3.58%)
SFRH7 9693.0 -7.5 (this is still peak contract on SOFR strip, but now more consistent with 3% terminal rate)
SFRH8 9678.5 -7.0
SFRH9 9661.0 -6.5
–In treasuries, new low in 2/10 to 43 bps (2s 3.58, +8.8 bps & 10s 4.053, +7.4 bps). New recent low as well in 5/30 to 90 (3.696/4.597).
–Other notes from Powell: FF now 3.75/4.0% and most current estimates of neutral rate are between 3 and 4%. “Policy is still modestly restrictive”. Inflation apart from tariffs is pretty close to 2%. Miran dissented for a cut of 50. Schmid dissented for no cut. A wash. (Guess who gets replaced in the February Fed President re-appointments?)
–SFRZ5 settled -9.0 at 9627.0. On Tuesday, with a settle of 9637.0 the 9637.5 straddle settled 9.5. By yesterday’s close it was 10.5 in the money and the 9625^ settled 13.0. The huge long in SFRZ5 9650/9662.5cs (originally bought from 1.5 down to 0.75) is currently under water as spread settled 0.5. Still nearly 950k open in 9650c, settled 0.75, down 1 on the day.
–Quite a bit of post-mkt activity in equities with META and MSFT getting hit on earnings reports, and GOOGL soaring. AAPL and AMZN today. NVDA around $5t mkt cap. Russell 2000 in TOTAL is $3.4T.
–Trump and Xi Agree One Year Trade Truce (BBG). Not sure what the ultimate outcome will be, but when markets don’t react positively to positive news (and I would have to put this in that category), it’s bearish. We’ll have to see how it shakes out…
–In the meantime, some news that’s far removed from SOFR and Treasuries.
First, a furloughed IRS lawyer wears his suit and tie to a new gig: selling hotdogs from a streetcart: Shysters Dogs!
https://www.npr.org/2025/10/29/nx-s1-5589165/furloughed-federal-employee-hot-dog-stand
And then there’s this. (The bottom vector of the K in the so-called K shaped economy is moving higher up on the vertical axis).
I love this auto-repo company slogan: “Don’t make it / We take it”
A great quote in the article: “…the volume, it’s so big. You’re in a target-rich environment.”
TARGET RICH. Brimming with optimism!
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