Fed slipping into the background
May 13, 2025
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–Weekend US/China tariff progress sent rate futures hurtling lower. Red SOFR pack (SFRM6, U6, Z6, H7) down nearly 17 bps to an avg price of 96.54625, around 3.5%. Green pack -14.375, blue pack -11.125. The two year treasury yield at futures settlement was exactly 4.00%, up 11.9 bps. Ten year yield rose as well, but the curve flattened hard as long liquidation primarily occurred in shorter maturities. Tens rose 8.6 bps to 4.457%. 2/10 posted a new recent low of 45.7 bps, while 5/30 ended at 78.8, down 5.8 bps. The last session of April saw SFRM5/SFRU5 calendar settle at -45 bps (9591.5/9636.5). Yesterday that 3-month calendar settled -26 (9570.5/9696.5). So in less than two weeks U5 is now approaching where M5 was, as forward easing prospects are crushed. On April 30, the peak SOFR contract was SFRU6 at 9706. Now the peak is SFRZ6 at 9657, 50 bps lower. Stocks soared with SPX +3.26% and Nasdaq 100 +4.3%.
–However, in a veiled warning to stocks, the long bond yield continues to press higher. At settlement the 30y yield was 4.889%, up 5.8 bps, ref USM5 settle of 113-16. Post-settle USM5 traded as low as 113-07 and 30y yield at 4.907%, just a short distance from the year’s January high of 4.977%. Kevin Muir, (MacroTourist) notes that on a large yield increase >50 bps, much longer duration bonds will become cheapest-to-deliver into the futures bond contract. That is, the bond future will trade with a higher duration, something to keep in mind if 30s take out 5%.
–CPI today expected +0.3 both headline and Core. On yoy basis, 2.4% with Core 2.8%.
