Leverage risks abound; market discounts
April 19, 2026 – Weekly comment
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(Bloomberg 4/17) — A buildup of leveraged hedge fund bets in Treasuries has left investors exposed to abrupt position shifts that could amplify stress across global bond markets, according to Apollo Global Management Inc. Chief Economist Torsten Slok.
Hedge funds now own roughly 8% of the entire $31 trillion US Treasury market, according to Apollo calculations, based on the latest data from the Federal Reserve and Office of Financial Research. That’s up from just 3% five years ago. The buildup has been fueled by heavy borrowing, with combined financing via repurchase agreements and prime brokerages now exceeding $6 trillion, Slok said in a Friday blog post.
According to Google, the duration of outstanding treasury debt is around 71 months, just under six years. Here’s a 5y chart of the 7-year treasury yield to SOFR. At the end of March there was about 60 bps of positive carry (7y 4.25% and SOFR 3.65%). Since 27-March the 7y yield has fallen from 4.25 to Friday’s 4.03%, but there’s still a lot of juice in levered carry.
The blow-up risk was in 2023 and 2024. Even though we’ve had the oil shock this year, with renewed fears of inflation and possible Fed tightening, the second white contract to second red SOFR, now SFRU6 to SFRU7 has remained inverted, ending Friday at -22 (9642/9648). This week SFRM6/SFRM7 spread fell 9 bps to -22.5. Overall, the SOFR curve has steadfastly leaned toward a modest ease rather than hike, and with the late week plunge in oil, even a bit more so.
There continue to be shrill warnings about all types of risks, and given outstanding global debt levels and geopolitics, it’s no wonder. However, VIX at Friday’s close at 17.48 is the lowest since early February, off from a high on March 27 of 31.05. Likewise, MOVE ended at a new low of 65.7, again, back at February levels, off a March 26 high of 115.02.
On Friday, Fed Governor Chris Waller gave a balanced assessment for policy going forward. He discussed the huge decline in net immigration…”means that very little or no net job creation is necessary to absorb new workers into employment.” He also, of course, notes the Middle East situation, “Beyond the length of these disruptions, with this economic shock coming on the heels of the boost to prices from import tariffs, I believe there is the possibility that this series of price shocks may lead to a more lasting increase in inflation, as we saw with the series of shocks during the pandemic.”
I will be cautious when faced with a sequence of transitory shocks [tariffs, oil]. While intellectually it makes sense to look through each shock, with a sequence of shocks, policymakers need to be more vigilant. This is because if the shocks hit one after another, they will keep inflation elevated for quite some time. The standard “look through” can become problematic if businesses and households start to believe inflation is persistently high and it affects their price- and wage-setting behavior.
With respect to policy in the event of Open Hormuz or Continued Hormuz Disruption:
If open and ‘normal’, then “… I see a forecast in which underlying inflation would continue to move toward 2 percent, leaving me cautious about rate cuts now and more inclined toward cuts to support the labor market later this year when the outlook is more steady.”
In the case of continued disruptions, “A slower economy would restrain demand for goods and services, and perhaps soften the increase in prices, but I expect higher inflation than in the first scenario and that it would be elevated for some time. In this case, I also believe we would have a weaker labor market. High inflation and a weak labor market would be very complicated for a policymaker.”
So, no huge hurry to ease, no discussion of balance sheet, pretty much in line with what the SOFR curve Is saying…modest easing likely ahead, but timing could be a ways off.
https://www.federalreserve.gov/newsevents/speech/waller20260417a.htm
On the whole, the message from markets is that the big crises are avoided; vol rarely stays elevated and equity markets appear confident that liquidity will remain abundant even if physical commodity markets are tight.
OTHER THOUGHTS / TRADES
Buying last week of TYN6 109.5 and 109 puts. TYN6 109.5p now has the most open interest of any TY put, with 149k open, Settled 19 with just 20 delta ref TYU 111-175. In May and June the heavy open interest puts are much closer to the money: May, going out Friday: 111p settled 3 with 12d, 110k open. June 111, 110.5 and 110p have 108k, 110k and 118k, settle 22 with 32d, 14 with 22d and 9 with 15d ref 111-23.
There were also three 50k lot clips of weekly calls bought covered: TYM6 settled 111-23.
TY wk1 May 112.0c settled 16 with 38d, 51k open (bot 4/13, 11 cov 111-03, 19d)
TY wk2 May 112.0c settled 23 with 41d, 54k open (bot 4/17, 15 cov 111-12, 21d, so +400k 64’s on calls, and down 231k 64’s on futures).
TY wk2 May 112.5c settled 13 with 26d, 51k open (bot 4/16, 10 cov 111-14, 16d, slightly up)
Week 2 calls expire 8-May, the employment report.
Still seems like SFRZ6 is trading somewhat rich. SFRU6/Z6 is -6.0 (9642/9648), SFRZ6/H7 is -4.0 (9648/9652) and SFRH7/M7 is -5.5 (9652/9657.5). So currently Dec/Mar/Jun fly is +1.5. I would expect this fly to move back into negative territory. Recent low is -4.5 on Feb 27. Dec 31 is on Thursday, so it’s a long ‘turn’.
Love this X post. Elephant slapping the Software shorts. So what if it’s AI generated. The rally was too….
News this week:
Tuesday:
POSSIBLE Senate hearing on Kevin Warsh nomination as Fed Chair
Philly Fed Services
Retail Sales (expected +1.4% m/m)
Thursday:
Chgo Fed and Jobless Claims. S&P PMI
| 4/9/2026 | 4/17/2026 | chg | ||
| UST 2Y | 379.9 | 370.0 | -9.9 | |
| UST 5Y | 393.9 | 383.8 | -10.1 | |
| UST 10Y | 431.5 | 424.4 | -7.1 | |
| UST 30Y | 491.2 | 488.3 | -2.9 | |
| GERM 2Y | 259.8 | 240.5 | -19.3 | |
| GERM 10Y | 305.6 | 295.8 | -9.8 | |
| JPN 20Y | 331.4 | 326.3 | -5.1 | |
| CHINA 10Y | 180.8 | 176.7 | -4.1 | |
| SOFR M6/M7 | -13.5 | -22.5 | -9.0 | |
| SOFR M7/M8 | -9.5 | -3.0 | 6.5 | |
| SOFR M8/M9 | 12.5 | 15.5 | 3.0 | |
| EUR | 117.28 | 117.65 | 0.37 | |
| CRUDE (CLM6) | 89.93 | 82.59 | -7.34 | |
| SPX | 6816.89 | 7126.06 | 309.17 | 4.5% |
| VIX | 19.23 | 17.48 | -1.75 | |
| MOVE | 72.15 | 65.70 | -6.45 | |
