Spreads suggest ‘inflate out of it’ policies
July 17. 2025
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–Initial turbulence in yesterday’s session revolved around headlines that Trump had asked Republican lawmakers if he should fire Powell, and that ‘Trump is likely to fire Powell’ (WH official). Stocks and bonds immediately tanked; front end rate futures jumped, along with implied vol. Shortly thereafter, the chicken-out pivot came, with ‘Trump not thinking of firing Powell’. Ultimately, the core theme the market is coming away with is that the admin is pursuing policies that may juice growth, but at a price of higher inflation. As an aside, PPI yesterday was 0.0, but previous readings revised slightly higher.
–Concerns about higher inflation are reflected in spreads: Ten yr breakeven (treasury – tip) edged to another modest new high at 245 bps. 2/10 treasury spread ended (at futures settlement) at a new high 57 (though the recent high was in April at 64.2). 5/30 is at its best level since 2021 at 103 bps. Attached is a chart of 2/30, at 113. The trend line target is 150. High post-covid has been 229. The 2y note yield was down 7.3 bps on the day to 3.88%, while the 30y was nearly unch’d, just over 5.01%.
–On the SOFR strip, several near calendars made new lows. As the attached article from 2019 indicates, if Powell were to be removed, Vice Chair Jefferson would take the slot and a new appointment by Trump would have to be confirmed by the Senate. Takes some time. New low in SFRH5/M5 3m spread at -23.5 (9638/9661.5). New low in SFRZ5/Z6 1-yr calendar at -69.0 with Z5 up only 4 bps to 9612, but Z6 up 10 to 9681.0. SFRZ6 is still the peak SOFR contract.
–Trade highlights: another 90k bought 2QH6 9800/9825cs for 0.875 synth. This week’s total 150k, settled 0.75 vs SFRH8 9656.5. TYV 108p/TYX 107.5p stupid, 51 paid for 7.5k (2 day total 20k), settled 23 and 26. New buyer of 100k TYQ 115.5c for cab-7. Aug options expire a week from tomorrow and these calls are 5 points otm, but a week can contain a lot of risk given our current cast of characters.
–Today includes Retail Sales, expected 0.1 from -0.9 last. Job Claims expected 235k. Philly Fed Mfg -1 from -4.
