Breaking Points
June 8, 2025 – Weekly Comment
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Below is a chart of the copper/gold ratio compared to the 10y treasury yield. I had first heard it mentioned by Jeffrey Gundlach of DoubleLine. From 2019 (DoubleLine website)
Broadly speaking, the ratio of copper to gold can serve as an indicator of the market’s appetite for risk assets versus the perceived safety of Treasuries. More specifically, the ratio of copper to gold can serve as a leading indicator of the direction of the yield on the 10-year U.S. Treasury note.
Like a lot of things, that relationship broke in 2022. A rise in copper/gold once signified industrial demand, the backbone of the economy. It’s only about gold now and the cloud over fiat currencies.
In our new economy, the driver is not industrial copper, but rather information technology. So I created a chart with AAPL, AMZN, GOOGL, META, MSFT, NVDA (cap weighted) divided by gold. I excluded TSLA due to its specific political issues. The chart shows the surge from 2020, and the belated catch-up by the Fed and 10y yields. I don’t think there’s enough information to make this chart a useful indicator, but if it does have any predictive power, then this year’s decline in Mag6/gold might point to an economic slowdown and corresponding decline in yields.
In terms of the new economy and AI sweeping away jobs like a failed dam washing away a downstream town, friend TS sent me this link:
https://arstechnica.com/tech-policy/2025/06/openai-confronts-user-panic-over-court-ordered-retention-of-chatgpt-logs/
Late Thursday, OpenAI confronted user panic over a sweeping court order requiring widespread chat log retention—including users’ deleted chats—after moving to appeal the order that allegedly impacts the privacy of hundreds of millions of ChatGPT users globally.
In a statement, OpenAI Chief Operating Officer Brad Lightcap explained that the court order came in a lawsuit with The New York Times and other news organizations, which alleged that deleted chats may contain evidence of users prompting ChatGPT to generate copyrighted news articles.
Of course Large Language Models pirate copyrighted material, and obviously not just from NYT. In my opinion there’s no way around it. Yes, the legal profession is involved.
From an article on the Daily Mail which outlines job destruction wrought by AI (link at bottom):
From a distance, the job market looks relatively buoyant, with unemployment holding steady at 4.2 percent for the third consecutive month, the Labor Department reported on Friday.
But it’s unusually high — close to 6 percent — among recent graduates.
The Federal Reserve Bank of New York recently said job prospects for these workers had ‘deteriorated noticeably.’
Obviously, Friday’s US Employment report sparked a large jump in rates. On the week, the 5y surged 14.5 bps to 4.126% (up 13.8 Friday). Tens rose 9 bps on the week to 4.508% (up 11.7 Friday). SFRZ5 settled 9609 or 3.91%, only about 40 bps lower than the current Fed Effective rate. Previous Friday’s settle was 9619.5. Was the yield rise due to the realization of an economy that just won’t roll over, or is it partially due to other factors, like upcoming supply? I am keeping an open mind, but will highlight a couple of articles:
BBG (6/6/25): Muni Market Sees $20 Billion Supply Week, Biggest Since 2017
Municipalities have been selling debt at a rapid clip…with issuance running about 20% higher than the same period last year. The rush comes as pandemic-era stimulus aid dwindles and inflation drives up the cost of projects.
The market is gearing up for another heavy week of supply next week…$15.7 b calendar would be notched as the 10th largest tax-exempt weekly supply on record.
BBG (6/7/25): Corporate Cash Levels Are Starting to Fall
The biggest companies can distort averages, and by some measures many high-grade companies aren’t looking great. Leverage levels, for example, have been better about 80% of the time over the last two decades, a UBS analysis found.
“The large liquid megacaps have certainly outperformed,” [UBS] Mish said. “Under the hood, there certainly is a little bit more weakness.”
About $25b of US high-grade bond sales are expected in the coming week.
Finally,
June 5 – Financial Times (Ian Smith) For the first time in almost a generation, governments are starting to face resistance from the market when they try to sell long-term debt. ‘It’s a classic supply-and-demand mismatch problem, but on a global scale,’ says Amanda Stitt, a fixed-income specialist at… T Rowe Price. ‘The era of cheap, long-term funding is over, and now governments are jostling in a crowded room of sellers.’”
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News this week:
Tuesday: NFIB Small Biz Optimism (last at 95.8, it has retraced the post-election surge).
3yr auction
Wed: CPI m/m 0.2 and Core 0.3. y/y 2.5 and 2.9 from 2.3 and 2.8
10yr auction
Thursday: Jobless Claims and PPI 0.2 and Core 0.3. Also FED Z.1 Household Net Worth Q1
30yr auction
Friday: UofMich. Joanne Hsu who heads the sentiment survey, was on Thoughtful Money last week:
“We’re seeing worries across multiple dimensions of the economy. Relative to six months ago we have consumers not only worried about business conditions, they’re also worried about their own personal finances…”
TRADE THOUGHTS
Once again huge buying in SFRZ5 9562.5/9537.5ps, now for 1.5 to 1.75, initially bought for 1.125 synthetically. About 50k added on Friday, settled 1.5 vs 9609.0. Needs a hike to play out. As of Friday, 9562.5p has 546k open (3.0s) and 9537.5 has 432k open (1.5s).
Another interesting trade which is more reasonable if one thinks the Fed doesn’t hike, but also doesn’t ease into the end of the year: Buyer of SFRZ5 9587.5/9568.75ps vs same in SFRH6, paying 2.0 (just 8k). These put spreads are 18.75 wide, and the lower strike is right where SFRM5 is trading now (M5 settled 9567.75). If there’s no ease this year, the trade should work nicely as the Dec put spread fills out to 18.75 and the March put spread, with three months of additional time value, would not be worth 18.75. Of course, it works best if the curve just rolls to the same relative positions as Friday: SFRM5 9587.5/9568.75ps settled Friday at 18.5 vs M5 9567.75 and SFRU5 same ps settled 11.75 vs U5 9585.5, so 6.75 spread to spread.
Also of note, some new buys in SFRH6 calls: +35k SFRH6.M6 9862.5c stupid for 6.0, settled 1.75/3.75 or 5.5. Buyer of 20k SFRH6 9800c vs -30k 9900c for 5.5, settled 4.25/1.0 or 5.5 for 2×3. New buyer (just 5k) SFRH6 9700c for 14.0 covered 9631.5 (settled 13.25 vs 9628.5). Disaster hedge.
One last trade: Buyer 12.5k SFRN5, Q5, U5 9575/9593.75/9600/9618.75 c condor strip for 13.0. All have SFRU5 as underlying, which settled 9585.5. Max profit is between middle strikes, so let’s say there’s one ease: Current EFFR is 4.33 and it would go to 4.08 or 9592.0. And then the world freezes at that price!? Instructive to look at the matrix:
SFRU5 9585.5s
JULY AUG SEPT
9575c 12.25 14.50 16.50
9593c 5.00 8.50 10.50
9600c 4.00 7.00 9.00
9618c 2.25 4.50 6.00
CNDR 5.50 3.50 3.00 (sum 12.0)
Above are all just examples of trades that went through expressing differing scenarios. The theme of trade this week in futures was: 1) easing prospects pushed further back on the curve 2) terminal rate pegged a bit higher 3) some bets for an actual hike.
| 5/30/2025 | 6/6/2025 | chg | ||
| UST 2Y | 391.5 | 403.9 | 12.4 | |
| UST 5Y | 398.1 | 412.6 | 14.5 | |
| UST 10Y | 441.8 | 450.8 | 9.0 | wi 451.0 |
| UST 30Y | 493.2 | 496.2 | 3.0 | wi 496.4 |
| GERM 2Y | 177.2 | 187.8 | 10.6 | |
| GERM 10Y | 249.9 | 257.3 | 7.4 | |
| JPN 20Y | 239.7 | 233.0 | -6.7 | |
| CHINA 10Y | 170.0 | 168.9 | -1.1 | |
| SOFR M5/M6 | -91.3 | -75.75 | 15.50 | |
| SOFR M6/M7 | -11.0 | -8.0 | 3.0 | |
| SOFR M7/M8 | 24.0 | 21.0 | -3.0 | |
| EUR | 113.49 | 113.96 | 0.47 | |
| CRUDE (CLQ5) | 59.79 | 63.63 | 3.84 | |
| SPX | 5911.69 | 6000.36 | 88.67 | 1.5% |
| VIX | 18.57 | 16.77 | -1.80 | |
| MOVE | 92.11 | 89.65 | -2.46 | |
