Can Confidence Crack – CCC due to BBB
July 6, 2025 – Weekly comment
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A couple of weeks ago, I listened to a podcast featuring Brent Donnelly. In it, he said that a friend urged him to read The Storm Before the Storm; The Beginning of the End of the Roman Republic (by Mike Duncan). The recommendation was given due to striking parallels between that period of political and social upheaval and today. The friend had to pester Donnelly into reading the book, and of course, he ultimately agreed that comparisons were on target: corruption of the political elites, issues of wealth distribution and rights, the devolution of civil discourse and institutions. The period covers a long sweep, from 146 to 78 BC.
In what could easily apply to Washington DC, when Jugurtha, King of Numidia in North Africa, departed Rome after being summoned to testify, “he issued his famous judgment: ‘A city for sale and doomed to speedy destruction if it finds a purchaser.’”
Chapter 1 begins with this quote:
Thieves of private property pass their lives in chains; thieves of public property in riches and luxury
–Cato the Elder
Perhaps a note coinciding with US Independence Day, which leads off with negative connotations related to the fall of an empire is inappropriate, but a general sense of dismay regarding the fiscal irresponsibility of the BBB is the catalyst. I claim no expertise on ramifications or details of new legislation, but I do have the sense that this administration seeks to manipulate markets in whatever way deemed necessary to generate desired outcomes. I’m hoping for the best but harboring nagging uncertainties.
An example is last week’s item: FHFA’s Bill Pulte calls on Congress to investigate Fed Chair Powell. All that comes to my mind is the only endearing thing I ever heard Lawrence Summers say (in this case about the Winkelvoss twins)
“One of the things you learn as a college president is that if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o’clock, there are two possibilities. One is that they’re looking for a job and have an interview; the other is that they are an asshole. This was the latter case.”
My personal feeling is that Powell may have made a few errors in policy, but he’s above reproach as a public servant. Mr. Pulte appears to be a yapping lap dog. In a suit.
In terms of policy errors, the global zero-to-negative rate regime ranks near the top. It went on for too long, culminating in what I am sure will be more stories like this: 138 Year Old Del Monte Foods files for bankruptcy. The firm cites changing consumer habits toward private labels, and tariffs on steel used in canning, but perhaps the largest catalyst relates to debt: (BBG) “The firm’s cash interest expense increased from $66 million in 2020 to $125 million in the 2025 fiscal year …materially exceeding current projected earnings before interest and taxes.” Rates were zero in 2020, 2021; buy-out targets were loaded with debt which now needs to be refinanced at market rates.
A lot of long-delayed cash flow problems seem to be bubbling to the surface, including one related to the end of the student loan debt moratorium. From Torsten Slok of Apollo:
“FICO scores could go down roughly 65 points on average, with up to 10% of US households facing a steep decline in their credit score. This could impact their ability to get new loans to finance the purchase of a car, a house, or new furniture.”
There are many crosscurrents in the data, notably highlighted by Thursday’s stronger than expected payroll data (147k, 4.1%) versus, for example the ADP report showing 33k job losses, and MSFT cutting 9k employees. I saw a couple of posts on X: Bravos Research: Every major recession since 1980 was preceded by this signal which has just been triggered: over 30% in the Conference Board survey expect there to be fewer jobs in six months. From @GlobalMktObserv : “Leading Economic Index has fallen ~5% annualized over 5 months, triggering a recession signal. It’s down 16% from its peak and hit a 9-yr low. Such drops have preceded every US recession since 1960.”
Next question is what data we can trust. News articles are bemoaning cuts in federal spending at agencies that collect statistics. Shouldn’t the whole AI boom make retrieving solid data easier at less cost? Google has had a price tracking index since 2010 and of course Truflation has a similar database, which shows a range of 1.85% to 2.27% in consumer inflation over the past two months.
During Powell’s June 18 FOMC press conference, he said “…the labor market’s not crying out for a rate cut.” On the SOFR strip, eases are priced in, but the highest contract, SFRZ6 settled Thursday at 9682.0 or 3.18%, less than 1.25% lower than the current Fed Effective rate of 4.33%. August Fed Funds settled 9568.5, now indicating only about a 5% chance of a rate cut at the July 30 FOMC.
The following chart shows the US 10y yield vs EFFR (Fed Funds Effective Rate). In this calendar year, the spread has ranged from +46 to -33, and in the past three months it has been even tighter, from +27 to -17. Trump’s crying, Pulte is crying. But this spread isn’t. On the other hand, SFRZ5/Z6 made a new low settle Thursday at -65.5 (9616.5, -13.5 & 9682, -6.5). One-year SOFR spreads have been inverted for a long while but are not extreme. I personally had thought conditions justified an ease at the MAY FOMC. But the market is NOT currently forcing the issue. Looking at the MOVE index and SOFR straddles reinforces the same idea. MOVE at 86.09; in the past year there are only two instances it pushed below that level: mid-December at 82.4 and mid-Feb at 83.9. On Tuesday atm SFRZ5 9631.25^ settled 42.75, on Thursday the atm 9612.5^ settled 36.5. This decline is partially due to the move to a lower strike, but on Thursday the 9631.25^ settled 42.0 (from 42.75). even with a 13.5 bp move in the underlying future.
It’s somewhat interesting to note that while the spread between overnight funding rates and the 10y yield has been fairly tight since February, over the same time frame the 10y to 30y spread rallied from 19 to 55 bps (51.2 on Thursday).
Note that post-covid this spread peaked at 85 bps, and post-GFC at 160 bps (not shown on chart). So it’s not at stretched levels. However, a return of bond vigilantes (as experienced in last week’s UK Gilt swoon) could blow spreads out. Could the BBB provide a catalyst?
From Philip Marey of Rabobank:
In the same letter on July 1, the nonpartisan CBO stated that compared with their January 2025 baseline budget projections, it would increase deficits over the 2025-2034 period by $3.4 trillion. So in reality, the OBBBA has a significant upward impact on the budget deficit.
What’s more, the bill front-loads tax cuts in the next few years and delays spending cuts, causing a rise in the budget deficit in the short run and political pressure down the road to extend the tax cuts, further increasing annual budget deficits. Many deficit-increasing measures are scheduled to expire in 2028, while many deficit-reducing measures do not start until after 2028.
OTHER THOUGHTS/ TRADES
At the end of 2017, in Trump’s first term, Congress passed the Tax Cuts and Jobs Act (TJCA). From the beginning of September 2017 to December, SPX rallied in anticipation, from 2476 to 2690, 8.6%. The rally accelerated post-passage, from 2696 on Jan 2 to 2873 at the peak on Jan 26, up another 6.5%. But by Feb 8, gains unraveled to 2581. The Jan 2018 high wasn’t exceeded until August.
I don’t anticipate knee-jerk buying due to BBB, but if there is, the above snippet is a cautionary tale not to chase it too aggressively.
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This week:
Tuesday: NFIB Small Business Optimism and Consumer Credit
Auction: $58b 3yr
Wednesday: FOMC Minutes. Tariff Deadline
Auction: $39b 10yr re-open
Thursday: Jobless Claims
Auction: $22b 30yr re-open
Friday: Federal Budget
| 6/27/2025 | 7/3/2025 | chg | ||
| UST 2Y | 374.9 | 388.0 | 13.1 | |
| UST 5Y | 383.1 | 393.1 | 10.0 | |
| UST 10Y | 427.9 | 433.4 | 5.5 | |
| UST 30Y | 483.7 | 485.1 | 1.4 | |
| GERM 2Y | 185.7 | 183.1 | -2.6 | |
| GERM 10Y | 259.0 | 261.3 | 2.3 | |
| JPN 20Y | 233.3 | 235.2 | 1.9 | |
| CHINA 10Y | 164.6 | 164.2 | -0.4 | |
| SOFR U5/U6 | -91.5 | -89.0 | 2.50 | |
| SOFR U6/U7 | 8.5 | 5.0 | -3.5 | |
| SOFR U7/U8 | 22.0 | 20.0 | -2.0 | |
| EUR | 117.18 | 117.86 | 0.68 | |
| CRUDE (CLQ5) | 65.52 | 67.00 | 1.48 | |
| SPX | 6173.07 | 6279.35 | 106.28 | 1.7% |
| VIX | 16.32 | 16.38 | 0.06 | |
| MOVE | 87.93 | 86.09 | -1.84 | |
