Loosening up the 401k strings
August 8, 2025
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–A lot going on. Yields a bit higher with flattening bias. 2y up 3.3 bps to 3.732%, tens up 1.1bp to 4.244%. On the SOFR strip, reds (2nd year) -4.625 to 9690 or 3.1% and golds (5th year) -1.75 to 9636 or 3.64%. Targeted SOFR call structures being placed to pin the FF target going into the end of the year. As an example, buyer of 30k SFRU5 9612.5/9625cs for 1.5. That one is a bit aggressive, requiring strong perceptions of a 50 bp cut at the Sept 17 FOMC; the options expire 12-Sept. More on FF targets below. (Maybe that SFRU c spd can find a cozy place in the 401k…)
–Speaking of which, (BBG) “Trump signed an executive order easing access to private equity, real estate, cryptoccy and other alternative assets in 401(k)s, a major victory for industries looking to tap some of the roughly $12.5 trillion held in those retirement accounts.”
Completely unrelated of course: BBG: “A Blackstone fund further cut the value of a PRIVATE CREDIT loan for Thoma Bravo- backed software company Medallia Inc, revealing growing stress for its single largest investment. …Blackstone’s publicly traded development company, Secured Lending Fund, marked the loan at around 87 cents on the dollar as of June 30…”
–Maybe the first snippet should be amended to “…a major victory for investment companies looking to off-load underperforming private equity and credit crap to retail.”
–Since I’m already veering a bit off course, I think building a bridge from Italy to Sicily is (also) stupid.
–In economic news Continuing Claims are continuing to edge higher, last at 1.974 million, new high since start of tightening cycle. Not really at a worrisome level yet, but similar upturns occur before previous recessions. Additionally, yesterday’s June Consumer Credit report was weak with Revolving Credit declining in both May and June. Bad. Q2 revolving credit growth was just 0.7%. Not keeping up with the Joneses inflation. Real retail sales up less than 1% this year.
Here’s a little table with FF effective rates given 25 bp cuts:
Current EFFR & 25 bp cuts:
4.33 = 9567 = NOW
4.08 = 9592
3.83 = 9617
3.58 = 9642
3.33 = 9667
3.08 = 9692
SOFR option trades on underlying SFRZ5 (December) target between 3 and 4 cuts, i.e. between 9642 and 9667. For example:
SFRZ5 9631/9637/9656/9662c condor 1.75 paid 5k
SFRZ5 9643.75/9656.25/9668.75c fly 1 paid 3k
There are other larger trades of this sort; I would simply note that SFRZ5 futures open interest is 1.385m, while SFRZ5 CALLS are over 4.7 million with peak strike 9650c at 445k (SFRZ5 9625.5s)
If the Fed cuts 50 in Sept, a LOT of those trades will need to be adjusted higher….
From Jackson Hole 2000 (Greenspan)
Earlier in the postwar period, even we in the West believed that market failure was a common occurrence. To some, this belief justified significant state controls and frequent intervention on the microeconomic level to improve, as they saw it, the functioning of markets and to maintain economic stability and growth. At the macroeconomic level, an exploitable tradeoff between unemployment and inflation was widely believed to exist, and a little inflation was perceived as useful to prime the pump of prosperity.
Remnants of those views, of course, remain. But it is remarkable how far economic opinions and “conventional wisdom” have shifted since the 1970s. At the risk of some oversimplification, there has been a noticeable reversion in thinking toward nineteenth-century liberalism, with the consequence that deregulation and privatization have become policies central to much governmental reform.
