The Third Mandate
November 9, 2025 – Weekly Comment
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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 | |
