From Micro to Macro
July 24, 2025
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–Yields rose yesterday as trade deals fall into place, removing some uncertainty. New high SPX. Tens up 5.4 bps to 4.388%. Reds were weakest on SOFR strip. The peak contract, SFRH7, fell 7.5 bps to 9682.5 or 3.175%. There’s a lot of micromanagement on display in SFRU5 options, using spreads just 6.25 bps wide. For the last nine sessions SFRU5 has settled between 9585 and 9581. This week so far, 83 to 83.5. Last week there was a large buyer (50k) of 9593.75/9600cs for just under 1.5. Yesterday a buyer of 20k call condor, 9600/9606.25/9618.75/9625 for 0.25 (max value between 9606.25 and 9618.75). Also a buyer yesterday of U5 call condor 9575/9581.25/9593.75/9600 for 2.125 to 2.50. So in this latter case, the lower call spread is in the money now. Rolling down from the 9593.75/9600cs? Doesn’t really appear that way from OI.
So, SFRU5 futures open interest was up 34k. SFRU5 9581.25^ settled 15.25. Call settles:
9575.00 12.0
9581.25 8.75
9587.50 6.00
9593.75 3.75
9600.00 2.75
9606.25 2.25
If I could pay 0.5 for the 9600/9606.25, I think it’s worth it. It wouldn’t surprise me if the market starts to price in 50 bps for a Sept ease, just like last year. If the market settles on the idea of NO cuts, then it’s likely that all these call strikes will expire worthless.
–From the micro to the macro. The Trump.2 era of ten-year yields has pretty much been bound by the levels from election day ~4.29% to Inauguration Day ~4.58%. Chart attached.
At one point early on, Bessent said the admin wasn’t worried about Fed Funds, but rather about the 10y yield. Since then it’s been nothing but wailing about Powell keeping funds too high, even though tens have been fairly well behaved. Yesterday, Existing Home Sales came out at a weak 3.93 million rate. (New Home Sales today). Trump acts as if a lower FF rate will act as a huge stimulus and save the gov’t loads of interest money & boost housing. But even a 1% drop in funds won’t save a tremendous amount, likely less than $100b per year. Yesterday I posted this chart on X, showing that in 2017-2019 the spread between the 10y treasury and 30y mortgage was about 150 bps. Now that spread is stubbornly above 240 bps. If Fannie and Freddie are privatized, it’s likely the market will demand EXTRA compensation for credit risk. What Trump and Pulte really want is a tighter spread and lower mortgage rates. Waller, who appears to be lobbying for the Fed Chair job, doesn’t want the Fed to even own MBS. Rapid cuts in FF could lead to higher, not lower, long end treasury yields. Does Bessent overtly come in as a buyer of MBS? Or institute Yield Curve Control? A ten year yield of sub-4% and a mortgage spread of 150 would mean 30 yr mortgage rate of < 5.5%. Probably enough to create activity….
https://x.com/AlexManzara/status/1947998605677068437
