New highs (maybe April WAS liberating)
June 27, 2025
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–New lows in near SOFR calendars as the market further embraces forward easing prospects. SFRU5/SFRZ5 3m calendar made a new low of -32 (9600/9632). The December yield of 3.68% is 65 bps lower than the current Fed Effective of 4.33. New low settles in near one-year calendars. SFRU5/U6 -92.5, down 5.5 on the day (9600/9692.5) and Z5/Z6 -64.5, down 3 on the day (9632/9696.5). SFRZ6 remains the peak contract on the SOFR strip, now butting up against 3% (9696.5 or 3.035%).
–If SOFR contracts are close to accurately projecting forward yields, consider things a year from now: inflation anchored around 2% (ten year breakeven is 2.30%), short term funding rates around 2.75 to 3.0%, perhaps a 10y treasury yield sub-4%, and 30y mortgage sub 5.5%. About as good as it gets. Equities at new highs yesterday against this backdrop.
–Longer yields fell, but not as much. Tens down 4 bps to 4.251% and 30s down 2.6 bps to 4.815%. New recent high in 2/10 to 53.8 bps (however the high in April was just over 64). 5/30 has made a new high for the cycle, ending yesterday at 101.8, the highest since October 2021. In Feb 2021, with funding rates at zero, the spread hit a high of 163. In 2010, (GFC) the peak reached over 300 bps. The open question is whether there could be a revolt in long-end yields due to unwieldy government finances. For now, a relaxation in SLR makes it likely that US banks can step up to absorb supply. New multi-year low in DXY (current 97.23) is a cautionary signal.
–News today includes PCE prices, expected 0.1% both headline and Core, with yoy expected 2.3% from 2.1% last and Core 2.6% from 2.5% last. Final U of M Sentiment and inflation.
