It’s a bull market in moral hazard (gold)
April 16, 2025
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–I was away from work for the past week, near Mount Hood, Oregon for a wedding. Also visited N. California and Eugene and Portland, OR. Beautiful country, but in Eugene, Oregon and in Portland, the drug and homeless problem is overt. I would say that what struck me at the wedding festivities that I hadn’t really noticed previously, is that several of the younger people talked about job cuts and were concerned about their own continued employment. It’s like the Ronald Reagan quote: “Recession is when your neighbor loses his job. Depression is when you lose yours. And recovery is when Jimmy Carter loses his.” In any case, I believe we’re in recession now. I don’t care what the big banks are saying about recession odds. Look around.
–During the few days I was gone, ranges were absolutely staggering. For example, from April 7 high prints to April 14 lows, SFRM6 = 75 bps 9726 to 9651. SFRZ6 also 75 bps, 9726.5 to 9651.5. SFRZ7 9705.5 to 9627.0 or 78.5 bps. When the Fed is ‘in play’ typically the 4th, 5th and 6th quarterlies are most volatile on the SOFR strip. But there were obviously large ranges further back as well (SFRM6 is 5th slot). Yesterday I marked 10s at a yield of 4.321%, right on top of the current 4.33% Fed Effective rate and SOFR setting from April 14 (also 4.33%).
–I loosely watch FV to US DV01 spread vs the vol spread. Currently futures DV01 are 43.30 (per $100k contract) and 127.50 or a ratio of 2.94. The vols for June, 5.31 in FV and 14.64 for US, ratio of 2.75. Typically the vol ratio is much lower relative to DV01 ratio (more like 0.80 vs 0.94 now) which intuitively makes sense; the 5y area is more volatile and sensitive to Fed moves. Currently it feels like US vol is too high on a relative basis, but that makes some sense as well, as the market is worried about inflation and concerned the Treasury might run into some difficulties placing long-term debt.
–None of this discussion is intended to be a specific trade recommendation, but when I marked settles in SOFR midcurves, I saw that nominal straddle levels of reds are higher than that of greens and blues. No big deal, it’s usually that way. However, I’m not sure if it SHOULD be that way in the current environment. As an example, 0QZ5 9675^ settled 84.0 ref Z6 9675.0s. 2QZ5 9650^ settled 77.5 ref Z7 9651.0s. Again, no specific trade, but given that US vol seems high, I would think that nominal levels of green midcurves are a bit too low on a relative basis. As mentioned above, the range was actually a bit larger in SFRZ7 than SFRZ6 last week.
–Powell speaks today on the outlook at the Economics Club of Chicago at 1:30 EST. I can’t help but think some covert liquidity operations/promises occurred recently to steady the markets. Supposedly a treasury basis trade blow-up but open interest in FV and TY down less than 5% from highs to lows in April. It’s a bull market in moral hazard, which necessarily translates to new highs in gold. GCM5 up $82 this morning at a new high 3323.
