Not lower rates
February 3, 2026
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–Yields rose Monday led by the red SOFR pack which ended down 5 at an average price 9671.25. Peak contract still SFRZ6 at 9678 or 3.22%, which is only 42 bps under the current Fed Effective rate of 3.64. For all the talk about Warsh being able to lower rates in the context of a smaller balance sheet and declining inflation, the market seems to be taking a ‘wait and see’ approach. Curve flattened. 2y rose 3.9 bps to 3.563 bps while 10s and 30s were both up around 2.9 bps to 4.269 and 4.903. Bearish factor was the ISM Mfg number, at 52.6 vs 48.5 expected. This data point is the high since mid-2022. New Orders surged to 57.1 from 47.7 last, high since early 2022 before the first hike.
–I’m not consulting AI on this, but it seems to me that a big chunk of GDP growth has been directly attributable to AI capex. On Sunday NVDA’s Huang said his potential $100 billion investment into OpenAI was NOT a commitment, but rather a ‘see how it goes’ program. In my opinion, a big red flag which was ignored by the end of Monday with ESH pushing toward new contract highs.
–In general, price action across markets seems to be somewhat, well, erratic. March NatGas: High on Friday 4.42 with settle 4.35. Monday low 3.155 with settle 3.24. Down 25% on settlements. Who couldn’t have seen that coming?
–A couple of disaster trades worth noting. Buy 36k TUJ6 106.375c for 0.5. TUM6 settled 104-077. A 10 bp change in yield is likely worth about 6.5/32 in the contract (napkin estimate). If TU gets anywhere near the 106 handle it means bad things are happening (gut projection). Somewhat less enthusiastically negative, a buyer of 35k SFRM6 9700c for 3 covered 9656.5 with 14d. Settled 2.75 vs 9654.
–JOLTS and NFP apparently delayed due to gov’t shutdown. Explained best by Peter Gibbons in Office Space: “I don’t like my job and I don’t think I’m gonna go anymore.”
