Ease pushed back
July 7, 2025
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–NFP +147k (rate of 4.1%) was strong enough to disabuse the market of any thoughts of a near term ease. Weakest contract was SFRZ5 which plunged 13.5 bps to 9616.5. That price/yield of 3.835% is 50 bps lower than the current EFFR of 4.33% suggesting 2 eases by year end (FFF6 settled 9619 or 3.81%). But not at the July 30 meeting: FFQ5 settled 9568.5, around 5% odds. SFRZ5/SFRZ6 one-yr calendar posted a new low -65.5 (9616.6/9682.0). Curve flattened hard: Z5 -13.5 at 9616.5, Z6 -6.5 at 9682.0, Z7 -4.0 at 9665.5 and Z8 -3.5 at 9647.0.
–On the treasury curve 2s jumped 9.5 bps to 3.88% and 30s up just 3 to 4.851%.
–Passage of BBB didn’t appear to have much effect on Friday’s abbreviated session, though stocks are seeing small profit-taking. USU5 currently prints 113-30, just edging out Thursday’s low of 113-31. This week brings more tariff drama and auctions of 3, 10, 30 year paper beginning tomorrow. FOMC minutes Wednesday.
Can Confidence Crack – CCC due to BBB
July 6, 2025 – Weekly comment
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A couple of weeks ago, I listened to a podcast featuring Brent Donnelly. In it, he said that a friend urged him to read The Storm Before the Storm; The Beginning of the End of the Roman Republic (by Mike Duncan). The recommendation was given due to striking parallels between that period of political and social upheaval and today. The friend had to pester Donnelly into reading the book, and of course, he ultimately agreed that comparisons were on target: corruption of the political elites, issues of wealth distribution and rights, the devolution of civil discourse and institutions. The period covers a long sweep, from 146 to 78 BC.
In what could easily apply to Washington DC, when Jugurtha, King of Numidia in North Africa, departed Rome after being summoned to testify, “he issued his famous judgment: ‘A city for sale and doomed to speedy destruction if it finds a purchaser.’”
Chapter 1 begins with this quote:
Thieves of private property pass their lives in chains; thieves of public property in riches and luxury
–Cato the Elder
Perhaps a note coinciding with US Independence Day, which leads off with negative connotations related to the fall of an empire is inappropriate, but a general sense of dismay regarding the fiscal irresponsibility of the BBB is the catalyst. I claim no expertise on ramifications or details of new legislation, but I do have the sense that this administration seeks to manipulate markets in whatever way deemed necessary to generate desired outcomes. I’m hoping for the best but harboring nagging uncertainties.
An example is last week’s item: FHFA’s Bill Pulte calls on Congress to investigate Fed Chair Powell. All that comes to my mind is the only endearing thing I ever heard Lawrence Summers say (in this case about the Winkelvoss twins)
“One of the things you learn as a college president is that if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o’clock, there are two possibilities. One is that they’re looking for a job and have an interview; the other is that they are an asshole. This was the latter case.”
My personal feeling is that Powell may have made a few errors in policy, but he’s above reproach as a public servant. Mr. Pulte appears to be a yapping lap dog. In a suit.
In terms of policy errors, the global zero-to-negative rate regime ranks near the top. It went on for too long, culminating in what I am sure will be more stories like this: 138 Year Old Del Monte Foods files for bankruptcy. The firm cites changing consumer habits toward private labels, and tariffs on steel used in canning, but perhaps the largest catalyst relates to debt: (BBG) “The firm’s cash interest expense increased from $66 million in 2020 to $125 million in the 2025 fiscal year …materially exceeding current projected earnings before interest and taxes.” Rates were zero in 2020, 2021; buy-out targets were loaded with debt which now needs to be refinanced at market rates.
A lot of long-delayed cash flow problems seem to be bubbling to the surface, including one related to the end of the student loan debt moratorium. From Torsten Slok of Apollo:
“FICO scores could go down roughly 65 points on average, with up to 10% of US households facing a steep decline in their credit score. This could impact their ability to get new loans to finance the purchase of a car, a house, or new furniture.”
There are many crosscurrents in the data, notably highlighted by Thursday’s stronger than expected payroll data (147k, 4.1%) versus, for example the ADP report showing 33k job losses, and MSFT cutting 9k employees. I saw a couple of posts on X: Bravos Research: Every major recession since 1980 was preceded by this signal which has just been triggered: over 30% in the Conference Board survey expect there to be fewer jobs in six months. From @GlobalMktObserv : “Leading Economic Index has fallen ~5% annualized over 5 months, triggering a recession signal. It’s down 16% from its peak and hit a 9-yr low. Such drops have preceded every US recession since 1960.”
Next question is what data we can trust. News articles are bemoaning cuts in federal spending at agencies that collect statistics. Shouldn’t the whole AI boom make retrieving solid data easier at less cost? Google has had a price tracking index since 2010 and of course Truflation has a similar database, which shows a range of 1.85% to 2.27% in consumer inflation over the past two months.
During Powell’s June 18 FOMC press conference, he said “…the labor market’s not crying out for a rate cut.” On the SOFR strip, eases are priced in, but the highest contract, SFRZ6 settled Thursday at 9682.0 or 3.18%, less than 1.25% lower than the current Fed Effective rate of 4.33%. August Fed Funds settled 9568.5, now indicating only about a 5% chance of a rate cut at the July 30 FOMC.
The following chart shows the US 10y yield vs EFFR (Fed Funds Effective Rate). In this calendar year, the spread has ranged from +46 to -33, and in the past three months it has been even tighter, from +27 to -17. Trump’s crying, Pulte is crying. But this spread isn’t. On the other hand, SFRZ5/Z6 made a new low settle Thursday at -65.5 (9616.5, -13.5 & 9682, -6.5). One-year SOFR spreads have been inverted for a long while but are not extreme. I personally had thought conditions justified an ease at the MAY FOMC. But the market is NOT currently forcing the issue. Looking at the MOVE index and SOFR straddles reinforces the same idea. MOVE at 86.09; in the past year there are only two instances it pushed below that level: mid-December at 82.4 and mid-Feb at 83.9. On Tuesday atm SFRZ5 9631.25^ settled 42.75, on Thursday the atm 9612.5^ settled 36.5. This decline is partially due to the move to a lower strike, but on Thursday the 9631.25^ settled 42.0 (from 42.75). even with a 13.5 bp move in the underlying future.
It’s somewhat interesting to note that while the spread between overnight funding rates and the 10y yield has been fairly tight since February, over the same time frame the 10y to 30y spread rallied from 19 to 55 bps (51.2 on Thursday).
Note that post-covid this spread peaked at 85 bps, and post-GFC at 160 bps (not shown on chart). So it’s not at stretched levels. However, a return of bond vigilantes (as experienced in last week’s UK Gilt swoon) could blow spreads out. Could the BBB provide a catalyst?
From Philip Marey of Rabobank:
In the same letter on July 1, the nonpartisan CBO stated that compared with their January 2025 baseline budget projections, it would increase deficits over the 2025-2034 period by $3.4 trillion. So in reality, the OBBBA has a significant upward impact on the budget deficit.
What’s more, the bill front-loads tax cuts in the next few years and delays spending cuts, causing a rise in the budget deficit in the short run and political pressure down the road to extend the tax cuts, further increasing annual budget deficits. Many deficit-increasing measures are scheduled to expire in 2028, while many deficit-reducing measures do not start until after 2028.
OTHER THOUGHTS/ TRADES
At the end of 2017, in Trump’s first term, Congress passed the Tax Cuts and Jobs Act (TJCA). From the beginning of September 2017 to December, SPX rallied in anticipation, from 2476 to 2690, 8.6%. The rally accelerated post-passage, from 2696 on Jan 2 to 2873 at the peak on Jan 26, up another 6.5%. But by Feb 8, gains unraveled to 2581. The Jan 2018 high wasn’t exceeded until August.
I don’t anticipate knee-jerk buying due to BBB, but if there is, the above snippet is a cautionary tale not to chase it too aggressively.
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This week:
Tuesday: NFIB Small Business Optimism and Consumer Credit
Auction: $58b 3yr
Wednesday: FOMC Minutes. Tariff Deadline
Auction: $39b 10yr re-open
Thursday: Jobless Claims
Auction: $22b 30yr re-open
Friday: Federal Budget
| 6/27/2025 | 7/3/2025 | chg | ||
| UST 2Y | 374.9 | 388.0 | 13.1 | |
| UST 5Y | 383.1 | 393.1 | 10.0 | |
| UST 10Y | 427.9 | 433.4 | 5.5 | |
| UST 30Y | 483.7 | 485.1 | 1.4 | |
| GERM 2Y | 185.7 | 183.1 | -2.6 | |
| GERM 10Y | 259.0 | 261.3 | 2.3 | |
| JPN 20Y | 233.3 | 235.2 | 1.9 | |
| CHINA 10Y | 164.6 | 164.2 | -0.4 | |
| SOFR U5/U6 | -91.5 | -89.0 | 2.50 | |
| SOFR U6/U7 | 8.5 | 5.0 | -3.5 | |
| SOFR U7/U8 | 22.0 | 20.0 | -2.0 | |
| EUR | 117.18 | 117.86 | 0.68 | |
| CRUDE (CLQ5) | 65.52 | 67.00 | 1.48 | |
| SPX | 6173.07 | 6279.35 | 106.28 | 1.7% |
| VIX | 16.32 | 16.38 | 0.06 | |
| MOVE | 87.93 | 86.09 | -1.84 | |
Happy 4th of July!
July 3, 2025
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–NFP today expected 110k from 139k last, with a rate of 4.3%. Given yesterday’s -33k ADP, risks appear weighted towards sub-100. I had expected to see quite a bit of high gamma put buys in front of today’s data as yields remain fairly low, but an example of a late trade was a buy of TY wk1 Monday 112.25 CALL covered 111-19, 6 paid for 10k. (TYU5 settlement of 111-20). Since it expires Monday, it captures both today’s data and weekend risks (terror threats).
–Early part of the session was dominated by UK politics, with Starmer leaving Chancellor of the Exchequer Reeves to twist in the wind. Unsurprisingly, UK finances are beset by faltering confidence. On Tuesday 10y Gilt yield was 4.453% and it shot up to 4.61; 30y went from 5.228% to 5.42%, nearly 20 bps. This morning yields have eased with 10y 4.545%.
–In US rates, the curve steepened. SFRU5 was strongest, at +1 to 9599. U6 -1.5 to 9685, U7 and U8 both -3 to 9675.5 and 9655.0. Ten-yr yield +4 bps to 4.289%, being drawn closer once again to the current EFFR of 4.33% which has acted as a magnet.
–Other snippets from yesterday:
-MSFT cutting 9k jobs, a bit less than 4% of workforce (228k)
-Del Monte (canned fruits/vegetables) filing for bankrupty. In and of itself not important, but perhaps a sign of things to come for companies that were loaded up with debt when rates were low, and now can’t handle re-financing.
-FHFA’s Pulte calls for Congress to investigate Powell. And stomps his feet for added emphasis.
–Nice pop in Corn and Wheat last couple of sessions (off lows).
–Rate futures SETTLE 12:00 CST (1:00 NY time). Screen stays open until 4pm CST (regular time), but stocks and cash treasury close early.
Fries with that?
July 2, 2025
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–Market rotation yesterday with selling pressure on front end of curve. Weakest contracts SFRM6, U6 and Z6, all down 7 to 9675, 9686.5 and 9690, with Z6 still the peak of the SOFR strip. While front end was weak, USU5 was almost unch’d after a soft start, settling 115-12, just -3. Cash 30y yield unch’d at 4.78%. TUU5, FVU5, SFRZ6 all had outside days and closed lower, suggesting hedging pressure, and concerns in front of tomorrow’s NFP, which is expected 110k from 139k last. Quarter-end SOFR rate was high at 4.45%, also a factor. Rotation in stocks as well with Nasdaq Comp -0.8%, SPX -0.1, but Russell 2k +1.0% as the Senate passed BBB. NQU5 was down over 200 late in the day. I would expect to see some high gamma put buys today in FV in front of NFP.
–JOLTS much stronger than expected 7300, coming out 7769. As friend JD notes, around 300k of the increase was in Accommodation and Food Services. From Wayne’s World: “I’ve had a lot of Joe jobs. Nothing I would call a ‘career’. Let me put it this way: I have an extensive collection of name tags and hairnets.”
–An X post arbitrarily said NFP would have to be under 50k for the Fed to consider an ease in July. The average NFP over the past year is 144k. NFP for October 2024 was originally released at just +12k but later revised to +44k. On the original release date, November 1, TY contract settled 110-01 and SFRZ5 was around one-year forward, settling 9630. Both settles were actually lower on the day. Yesterday, TYU5 settled 111-275 and one-yr forward SFR contracts are M6 at 9675 and U6 at 9686.5. August FF yesterday settled unch’d at 9572, still indicating about 20% odds of a July 31 cut. While a sub-50k number may increase rate cut odds, I would suspect the political environment and gov’t stimulus make the hurdle much higher.
–Several large trades are pegging SFRU5: Buyer of 45k SFRU5 9587.5/9593.75/9600/9612.5 broken call condor for 0 (and 5k for 0.25). This trade looks for just one cut at the Sept meeting; max value 6.25 on a settle between 9593.75 and 9600. More aggressive was a buy of 15k SFRU5 9600/9625/9650c fly for 4.0. SFRU5 settled yesterday 9598 or 4.02%, 31 bps under the current EFFR of 4.33%.
Stretched levels going into the year’s 2nd half
July 1, 2025
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-Dollar index new low this morning at 96.40, well below the level from which the Fed initially started its hiking campaign in 2022. $/yen has broken a support trendline in place since April’s low of 139.89 (which is essentially a double bottom from the Sept 2024 low of 139.58). Now 142.86. Gold has been in sdieways consolidation since May but is up 50 this morning with GCQ5 3358.
–US bonds making new highs. TYU5 currently 112-09+ vs yesterday settle 112-04. In the two weeks since June 16, 10y yield has fallen from 4.45% to this morning’s 4.196, essentially delivering one 25 bp ease since the June 18 FOMC (where the Fed passed on a cut). Over the same period, June 16 to present, 30y yield has fallen from 4.96 to this morning’s 4.74, and SFRZ6 has run 30 bps from 9668 to this morning’s 9698.5. ESU5 has galloped 1000 points since late April, from just over 5200 to this morning’s 6242. All levels which feel somewhat stretched going into the year’s second half, but of course, that doesn’t mean they can’t keep going given a backdrop of USD liquidity.
–This morning brings ISM Mfg expected 48.8 from 48.5 last and JOLTS expected 7300 from last at 7391. Lowest level of this cycle has been 7103 from last September; the high was 12134 on March 2022. In the 2 years prior to COVID, 2018 and 2019, JOLTs averaged around 7200.
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.
Run hot with Fed eases
June 26, 2025
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–Dollar index is at a new low this morning, with a print of 97.00. It’s now at a lower level than when the Fed first started its hiking campaign on March 16, 2022. At that time, DXY was 98.62 and the FF target was raised from 0 to 0.25-0.50%. By September the high was 114.78. The low at the start of 2021 was 89.21.
–Yesterday’s session in rates was somewhat quiet, with strength in the front end of the curve. Strongest SOFR contracts were SFRU5 and Z5, both +2 on the day to 9597.5 and 9627.0. Deferred contracts were unch’d to +1. Ten year yield was essentially unchanged at 4.29%. Powell was circumspect about the inflationary impact of tariffs in yesterday’s testimony. Tomorrow PCE prices are released, expected 0.1 both headline and Core, with yoy expected 2.3% from 2.1% last and Core 2.6% from 2.5%. Yesterday FFQ5 settled 9573.5 (+1.5). 50/50 odds of an ease at the July meeting would put FFQ5 at 9579.5.
–Things appear to be lining up for a ‘run hot’ economy. NQU5 is building on gains from the last couple of days and is close to making new all-time highs. Last print +92, 22553.
–News today includes Trade Balance, Final Q1 GDP, Jobless Claims expected 243k from 245k last. 7y auction.
There Will Be Easing
June 25, 2025
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–Buy America day as Israel/Iran ceasefire appears to be holding. SPX up 1.1%. Ten-year yield down 3.5 bps. Oil lower.
–Near SOFR calendars made new lows as Powell fielded questions and soliloquies from Congress. He said that rates were modestly, not moderately, restrictive. SOFR contracts from March’26 to March’30 were up 3 to 3.5 bps. The market continues to build easing into forward rates. SFRU5/SFRU6 one-yr calendar made a new low -88.5 (9595.5/9684.0) -3.0 on the day. SFRU5/SFRZ5 3-mo calendar also at a new recent low -29.5 (9595.5/9625.0). So that 3m calendar roughly signals more than one-ease, and the December price, which equates to 3.75%, is 50 bps lower than the bottom of current FF target (4.25 to 4.50%). I’ve noted previously that the Fed Effective rate of 4.33% seems to be an anchor for the 10y treasury, which closed 4.289% yesterday.
–In terms of an immediate ease, that is, one month from now on July 30, August FF showed no change in odds at around 20%, settling -0.5 at 9572.0. Current EFFR is 4.33 or 9567.
–Ed Bolingbroke of Bloomberg and Kevin Muir, Macro Tourist, yesterday highlighted the idea of forward spreads reflecting an easier Fed post-Powell (perhaps to modestly stimulative??). Below is a graph of SFRH6 (which covers the 3m period from mid-March to mid-June, just before Powell’s term ends), to SFRU6 which will give the new Chair the chance to get his feet wet with a couple of cuts. At the end of March, the spread was -8, (9649.5/9657.5). At yesterday’s settle it was -34.5 (9649.6/9684.0). That’s a change just about equal to one 25 bp move. An early buyer yesterday of 30k 0QU5 9725/9750cs for 3.5 reflects the same idea…forward easing of a magnitude greater than the market currently expects. Call spread settled 3.75 vs underlying SFRU6 9684.0. Lower strike is, of course, 2.75%.
Choreographed and Scripted
June 24, 2025
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–Choreographed is the word BBG uses in its description of Iran’s attack on bases in Qatar, which was immediately followed by Trump saying he would like to refrain from further military engagement, and later, the announcement of a cease fire. It’s rumored that Qatar suggested the attacks on its soil, making sure no personnel were injured. Following the face-saving salvo, Saudi Arabia condemned the attack in ‘the strongest terms’…”constitutes a flagrant violation of international law and the principles of good neighbors. It is unacceptable and cannot be justified under any circumstances.” Qatar, summoned the Iranian Ambassodor to condemn the action. “This cafe is closed until further notice…I’m shocked, shocked to find that gambling is going on in here.”
–In the 1991 Gulf War, the risk metric was the 3-month bill vs eurodollar spread, the TED. It was normally around 20 to 25 bps if memory serves. I believe it was around 60 as the US was rumored to enter the ground war. On the night the US entered Kuwait, the spread collapsed. Risk-off unwind. That’s what happened to oil yesterday. In the recent ‘liberation day’ episode, CLQ5 hit a high of 70.43 on April 2. On April 9 the low was 54.13, a range of just over $16. Yesterday’s high was 78.40 and this morning’s low is 64.38, a range of $14.
–On reports of Iran’s scripted attack, stocks powered higher, oil fell. US yields ended lower on the day. The 2y fell nearly 8 bps to 3.827%, and tens fell 5.1 to 4.324%. SFRM6 was the strongest on the SOFR strip, ending +10 at 9668.0. Peak contract is still SFRZ6 at 9685.5 (+9.5). SFRU5/U6 1-yr calendar posted a new low -85.5 (-4.0). Inflationary implications from higher energy prices evaporated. In that context: Bowman says open to July rate cut if inflation contained. So… Waller and Bowman are both eyeing July. August Fed Funds (FFQ5) settled +1.5 at 9572.5. 5.5 lower in yield than the current Fed Effective, around 22% odds of a July ease. Powell’s testimony in front of Congress starts today.
–Also today, the 2y auction, followed by 5s, 7s, Wednesday and Thursday. Consumer Confidence expected 99.8 from 98.0 last. The low spike in April was 85.7, which was right around Covid lows.
None Shall Pass
June 23, 2025
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King Arthur: Now, stand aside, worthy adversary.
Black Knight: Tis but a scratch
King Arthur: “A scratch?” Your arm’s off.
Black Knight: No it isn’t
King Arthur: Well, what’s that then?
Black Knight: I’ve ‘ad worse.
–Dramatic escalation in the mideast has oil slightly higher, ditto for stocks. Bonds a few ticks lower. CLQ5 hit a high of $78.40 Sunday night, up 4.56, but it has stair-stepped lower from there and is now around $74, from Friday’s settle of 73.84. Similarly, ESU was -59 at the low at 5959, but is now marginally higher on the day. Business as usual.
–It’s somewhat amazing that almost no market is showing a net change from Friday greater than 50 bps. Except platinum. That’s up over 2% to 1291, with gold down a few bucks.
–Today’s news includes S&P Mfg PMI expected 51 from 52. Composite expected slightly lower than last, at 52.1. Existing Home Sales 3.95m vs 4.00 last. The lowest number since 2011 has been 3.90m, last year in September. Mortgage rates are key.
