Treasury yields since the start of 2024

September 3, 2024
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Treasury yields since the start of 2024

Sept 3, 2024

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At the QRA in October 2023, Yellen loaded issuance with t-bills rather than coupons.  Along with other factors, the result was a huge decline in yields into the end of December, accentuated by Powell’s dovish pivot at the December FOMC.  

As the charts below show, 5’s tumbled from just under 5% to 3.8%.

Tens went from exactly 5% to 3.8%.  And the 30-yr went from just over 5.1 to 3.93%.  This year saw a rebound in yields into April, and now a renewed decline, as labor market conditions decelerate. 

I think it’s instructive to look at end-of-year lows vs the current decline.  Fives have edged to a lower level, but tens held the Dec low and are tentatively edging higher, and 30s never really reached end-of-year lows.   The differences aren’t exactly dramatic, but they do reinforce the theme of curve steepening, and make buying the long end a bit problematic, at least until new lows in yields are actually made.  Until then, 3.95% should be considered a floor for the 30yr bond yield.

SOFR OPEN INTEREST IS RELATIVELY LOW

September 2, 2024
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Anyone have a good reason for this??

Sept 2, 2024

In 2018 the Fed was gently hiking rates.  Peak FF level was 2.25 to 2.5%. 
At the time, PEAK OPEN INTEREST in eurodollar futures (aggregate) reached over 18 million as the chart below shows.

(blue line is aggregate open interest. ED1 is rolling first quarterly Eurodollar contract)

Eurodollars are now long gone, replaced by SOFR contracts.  SOFR futures aggregate open interest is near a record, but it’s only 11.276 million in total.  As the chart below shows, that’s with the Public Debt increasing 16% in two years. 

I’m assuming 2y, 5y and 10y treasury futures have siphoned off a lot of open interest that might have otherwise gone into SOFR.  All have recently hit record highs, TU 4.49m contracts, FV 6.95m and TY 5.516m.  In fact, in 2018 when ED open interest surged, FV OI peaked at 5.076m.  Last month’s FV peak OI was 37% higher. Perhaps ERIS SOFR swaps have taken a share.

One of the trades that has been lost is ED contracts vs Treasuries, as the credit aspect of STIRS was eliminated with SOFR. 

I’m not drawing any big conclusions, just posting for interest.

(white line is 3rd contract slot, currently SFRZ4. Blue line is aggregate open interest. Purple in lower panel is public debt).

Nominal might be more real than Real

September 1, 2024
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On Saturday I created the following two charts, covering two different time periods (pre- and post-covid).  On the top panel of each are the Midpoint of the FF target range (blue), Real GDP (amber) and yoy PCE price changes (green).  On the bottom panel is the yoy change in nominal GDP.

I was thinking about how some people are adamant the Fed should not ease, because what Powell deems as “restrictive” policy, really isn’t doing all that much to stifle (real) growth.

First, consider the top chart, which covers 2014 to 2019.  Around the middle of 2016 PCE prices started to accelerate, from below 1% to just above 2%.  Real GDP was stair-stepping higher as well.  Powell took it as an opportunity to begin ‘normalizing’ policy.  Going into 2018 (when Trump’s tax cuts were moved over the finish line) real GDP topped as inflation moved higher, but nominal GDP kept marching up.  In Q4 2018 SPX tumbled by 20%, and both real and nominal GDP declined.  PCE had topped at 2.3% in Q3 2018 but was under 1.5% by Q1 2019.  The peak FF rate of 2.375% was above PCE prices and exceeded real GDP for a couple of quarters, but was always well below nominal GDP.  NOTE: Real GDP is adjusted using the GDP Deflator, not PCE prices.

Now consider the chart below from post-covid to present.  FF are above real GDP and have been above PCE prices since Q2 2023 (restrictive).  At the low, nominal GDP grew by 5.6%, just a little above the FF target of 5.375%.  The other thing to notice is that nominal GDP has been decelerating for the past two-and-a-half years.  Just these metrics provide justification for easing, though it’s debatable if the 200 bps being priced by September of next year is reasonable. [FFV5 is 9675.5 or 3.245% vs the lower end of the current FF target of 5.25%]

The inclusion of Nominal GDP made me think of the Michael Lewis book ‘The Undoing Project’.  This is a fascinating read about human decision making.  Here’s an excerpt:

The theorists seemed to take it to mean “the utility of having money.” In their minds, it was linked to levels of wealth. More, because it was more, was always better.  Less, because it was less, was always worse.  This struck Danny as false.  He created many scenarios to show just how false it was:
Today Jack and Jill each have a wealth of 5 million,

Yesterday, Jack had 1 million and Jill had 9 million.

Are they equally happy? (Do they have the same utility?)

Of course they weren’t equally happy.  Jill was distraught and Jack was elated.  Even if you took a million away from Jack and left him with less than Jill, he’d still be happier than she was. In people’s perceptions of money, as surely as in their perception of light and sound and the weather and everything else under the sun, what mattered was not the absolute levels but changes.

Maybe relatively low levels of confidence are related to the deceleration of nominal income even though the level itself is solid.  Consider this as well: Money Market Fund assets stand at $6.26T.  At a yield of 4.75% that’s about $300b per year or 1% of GDP.   Perhaps Rick Rieder’s comments from several months ago ring true… the economy and inflation may well SLOW on rate cuts.  That $6t isn’t anxiously sitting on the sidelines just waiting to be deployed into equities…oh, maybe some of it is.  But most of it is sitting there saying, if nominal income is just a little over what I am making in a money market, and if stocks in aggregate are making somewhere around nominal income, why should I take risk vs a sure thing? 

One of the other key lines from this section of the book is:  “When they made decisions, people did not seek to maximize utility.  They sought to minimize regret.”  An example:

You must choose between having :
1) $5 million for sure
or, the gamble:
2) An 89% chance of winning $5 million
     A 10% chance of winning $25 million
     A 1% chance to win zero

Most people chose 1.  They preferred the certainty of being rich to the slim possibility of being even richer.  “If people mostly chose option 1, it was because they sensed the special pain they would experience if they chose option 2 and won nothing.” 

“But what was this thing that everyone had been calling ‘risk aversion?’  It amounted to a fee that people paid, willingly, to avoid regret: a regret premium.”

In today’s lexicon, FOMO captures regret premium in another dimension, the fear of being Jill when Jack is printing money being long NVDA.  The Fed is well aware that changes at the margin drive the economic narrative.  I think Powell is, in part, managing risk in order to avoid a repeat of late 2018, when the Fed was blamed for a sharp setback in stocks and had to reverse course in 2019.

Perhaps this meandering stroll about decision making is a bit much, only to justify rate cuts which the market is already aggressively pricing into next year.  On the other hand, the deceleration of nominal GDP, which is rarely mentioned, is likely more important to the nation’s economic psyche than published real GDP data.  But here’s another tangible event which is likely to weigh on the economy.  BBG reports the end of $1.6T student loan leniency… set to conclude at the end of September.  More than 40 million Americans have federal student debt.

I’ll just end with a decision-making story from CME days, which I found perfectly reasonable in terms of avoiding ‘special pain’ no matter how miniscule the odds.  On the first floor of the CME was a concession stand that sold candy, sundries, lottery tickets.  There was a large lottery and I was in line behind another member who was wearing his trading jacket as well.  He placed his order and the clerk said ‘fifty dollars’.  The guy whined, ‘I asked you for just FIVE dollars worth.’  I interjected and said, ‘No problem, I’ll take the other $45.’  The customer turned around, looked at me, looked at the acronym on my trading badge, and said to the clerk, ‘I’ll take all fifty.’  Suspicion, superstition, paranoia.  It’s hard to model those aspects of a snap decision, even for AI.   Of course, when it was my turn I said, ‘I’d like $50 as well, and I want the exact same numbers as that guy.’  Just kidding, I took the random draw.

This week culminates with Employment data, which is once again the most important data release.   NFP expected 165k with a rate of 4.2%. 

The main feature of what was a pretty quiet week was curve steepening.  Tens rose 11 bps on the week to 3.909%.  2/10 ended at -1.4 bps (3.923/3.909), the highest level since mid 2022.  The halfway back level from  the high in March 2021 of 157.6 to the low of June 2023 of -108.7 is just under 25 bps (next target).  On the SOFR strip, the weakest contract was March’28 which settled down 9 on the day at 9676.  H5 -5.5 at 9624.5, H6 -6 at 9688, H7 -8 at 9686.5 and then H8 at 9676.  Modest but surprising weakness in back end of curve.

	8/23/2024	8/30/2024	chg
UST 2Y	387.3	392.3	5.0
UST 5Y	362.3	371.3	9.0
UST 10Y	379.9	390.9	11.0
UST 30Y	410.1	419.6	9.5
GERM 2Y	237.4	239.2	1.8
GERM 10Y	222.5	229.9	7.4
JPN 20Y	170.1	170.9	0.8
CHINA 10Y	215.5	217.8	2.3
SOFR U4/U5	-168.5	-164.3	4.3
SOFR U5/U6	-19.0	-18.0	1.0
SOFR U6/U7	7.0	9.0	2.0
EUR	112.11	110.51	-1.60
CRUDE (CLV4)	75.54	73.55	-1.99
SPX	5634.61	5648.40	13.79	0.2%
VIX	15.86	14.96	-0.90

Excerpts from The Undoing Project are from pages 257 to 267.

Roll Calls

August 30, 2024
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–Yields rose as Q2 second estimate GDP proved stronger than expected at 3.0%.  Weakest contracts on the SOFR strip were Z4 and H5, both down 3 on the day (9576 and 9627.5). Deferred contracts -2 to -2.5. The lean for a 25 bp cut rather than 50 at the Sept 18 FOMC increased, but the outcome is far from certain, and may have to wait for next week’s NFP for market expectations to solidify.  Curve was stagnant, with 2s -2.7 bps to 3.89% and 10s -2.6 to 3.865%.  2/10 remains close to its recent high at -2.5 bps, threatening to dis-invert.  FFV4 settled 9500.5.

–Today’s news includes PCE prices, expected yoy +2.5 to 2.6 (vs 2.5 last) and Core +2.7%.  Powell downgraded the importance of the inflation mandate vs labor at Jackson Hole, so today’s data is not likely to shake things up unless there’s an outlier.  Chicago PMI follows, expected 45.6 from 45.3 last.  

–There were a flurry of late trades in TY options, mostly a roll of long October calls into December: 

Sells on block
TYV 115.0c 10k at 22
TYV 115.5c 9k at 15
TYV 116c 15k at 9
all covered 113-28+, 70d
then new buys:
TYZ 116c 45 paid 30k
TYZ 117c 31 paid 30k
TYZ 111p 29-30 paid 30k
(deltas on 117c and 111p both 21, delta on 116c is 29

Net bias to upside.

 TYX 114 straddle, paper sells 10,000 at 2-19 (settled 2’18)

**Abbreviated screen session on Monday’s holiday.  Won’t be in. 

NVDA approximately priced “right”?

August 29, 2024
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–Stock futures sold off going into NVDA earnings, and fell further post-call, but are higher this morning.  SMCI was down over 25% yesterday, though it rallied back with a loss of only 19% at 443.49.  In March this stock traded over 1200, yesterday the low was just under 400, a drop of 2/3rds.  Of course, its market cap is less than 10% of NVDA, but it’s still a dramatic move for a former darling.

–Rates were quiet.  Net change on SOFR strip +0.5 to -1.0.  Tens rose 2.3 bps 3.839% in front of today’s 7-year auction.  Other news today includes Jobless Claims expected 232k and the 2^nd revision of Q2 GDP.  PCE prices are released tomorrow, expected 2.6% yoy with Core 2.7%, both up 0.1 from last month.  TYV4 114^ settled 1’37 ref 114-025.  To get the same vol all else equal on Sept 3, the straddle price would have to be 1’23…likely to be some weight on premium today and Friday. 

Quart of Blood

August 28, 2024
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–SFRU4 settled 9509.5 as the market modestly adjusted odds on easing.  The lean is still for 25 rather than 50 at the Sept meeting, but it’s a pretty small bias.  SFRU4/U5 settled at a new low -170 (9509.5/9679.5).

–The morning featured large TY call buys:
+50k TY wk1 114c cov 11330, with 49d, 33 paid.  (1’06 in straddle).  Settled 38 vs 114-03. Call OI +50k. Sept 6, NFP, expiry. 
+17k TYV 114c cov 113-29.5, 49 paid (1’39 in straddle).  TYV 114^ settled 1’38 (Call 54s)

–On Monday morning TYV 113p had been bought in size 50k for 18.

–Treasury curve steepened.  2’s fell a few bps in yield to 3.901% (good auction) while tens rose 1.7 to 3.833%.  SFRH5 best performer, +4.5 to 9631.5, while H6 was up 1.5 to 9695.5 and H7 was unch’d at 9694.0.  Five-yr auction today.

–Post settlement Gold (GCZ4) edged above 2560. 

–The big news today is, of course, NVDA earnings.  It’s like the Quart of Blood technique.  Might be the longs, might be the shorts, but a quart of blood is gonna drop out of one side.  Maybe both.  Over $3T market cap trading at nearly 30x SALES. 

Below is Corn priced in Gold…new ALL-TIME low.

Time to buy an RV? Or Rolex

August 27, 2024
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–Last week PDD (parent of Temu) traded 150.  Today, after warning on revenue, it’s 100.  A BBG headline says this: crash “…Sends a warning on Chinese Economy” but it’s likely more than just China.  Nasdaq Comp down 0.85%… NVDA reports Wednesday.  Vast amounts of capital can appear or evaporate very quickly in this environment.

–Rates were quiet, though there were a couple of interesting large trades.  SFRU4 9512.5/9518.75/9525c fly traded 0.25 about 20k and settled there ref 9507.75.  The b/e is 9512.75 to 9524.75…pretty wide window with 23 days until FOMC.  Why count the weekends instead of just trading days?  Because a big geopolitical bomb could go off on any given day.  As an aside, CLV4 up 2.59 yesterday to 77.42 on Mideast spiral.  

–New low settle in SFRU4/U5 1-yr calendar at -168.75; traded as low as -172.5.

–Also a buyer of 50k TYV4 113p for 18, and then 112.75p, paid 18 for about 30k.  New positions: TYV 113p settled 22 with OI increase of 36k and 112.75p settled 18 with OI +39k. On the day, total TY futures OI +91k to 5.522m.  Bearish signal even though 10y yield only rose 1.7 bps to 3.816%. 2yr auction today, followed by 5’s and 7’s Wed, Thurs.

–Consumer Confidence expected 100.9 vs 100.3 last.

–Just a couple of anecdotal clips indicating that all is not well.  The first is from watchcharts.com   The luxury watch market is sliding (but at least it’s holding better than that Winnebago you bought post-covid!)

From ZH:

RV Downturn Turns Apocalyptic With Largest Dealership Offering 55% Discounts

LazyDays Holdings (GORV) an RV retailer, has seen its stock slip from 3 in December to 1.75 yesterday.  
https://www.zerohedge.com/markets/rv-downturn-entering-apocalyptic-mode-largest-dealership-offering-55

Could NVDA earnings be the deciding factor for 25 or 50?

August 26, 2024
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–Powell said “the time has come for policy to adjust”.  That was last week’s story.  This week the focus will be on NVDA earnings on Wednesday, or at least that’s what I am led to believe by scanning financial sites this morning.  Dan Ives of Wedbush says NVDA earnings make this the most important week for the stock market of this year, and maybe beyond.  I view that as somewhat fanciful, but we’ll see. 

–New low settles on Friday in near SOFR calendar spreads.  SFRU4/Z4 3-month spread settled -69, down 4 on the day (9509.5/9578.5).  SFRU4/SFRU5 one-yr settled -168.5, down 7 on the day (9509.5/9678).  While the market is undecided about whether the first ease next month will be 25 or 50 (currently leaning for 25) the easing post-election is being priced forcefully.  The high contract on the SOFR strip is SFRM6 at 9697.  I continue to view 3% as a soft cap on the forward part of the strip.  It might not ultimately be the “terminal rate” but I think the market will be reticent to price for anything sub-2.5% in this cycle.

–2s, 5s and 7s are auctioned Tues, Wed, Thursday.  PCE prices are Friday.  

–Treasury rolls are in full swing, with about 550k TY rolled Friday, 32% complete as of Friday’s close. 

Let’s Get Moving!

August 25, 2024 – Weekly Comment
**************************************

In the image below, that first guy, the one with the white hard-hat and the clipboard?  That’s the interest rate futures market.  The second guy that’s tagging along?  That’s Powell.  The pile of rocks is job losses and slowing growth, with the consumer getting buried.

First guy: “Look Jay, like I told you before, we’re going to have to use the front-loader to move these rocks.  Get in there and start shoveling!”  JP, “Can it wait for Jackson Hole?”

The graphical image in the futures market that is saying the same thing is the 6-month SOFR futures spread, SFRU4 to SFRH5.  As can be seen on the chart below (which is only a six-mo range) in just three months from late May to Friday, the calendar imploded from -36.5 to a NEW LOW of  -120.5.  On May 29, SFRU4 was 9478.5 and H5 was 9515.5.  Friday’s settles were 9509.5 and 9630.0.  The current SOFR rate is 5.31 to 5.35.  The rate on SFRH5 (ignoring compounding) is 3.70%, around 1- 5/8% lower than the current SOFRRATE.  That’s a lot of easing front-loaded into a six month period. 

In his Jackson Hole speech Powell said, “The time has come for policy to adjust.”  The SOFR futures calendars have increasingly been telegraphing that message, which Powell has now overtly blessed.  He stressed concerns about labor conditions as opposed to inflation.  Fire up the Komatsu.  (We bought it back in June as it became apparent we’d need it, when $/yen was 157).

In an interview Thursday, following the BLS downward revision of -818k from the originally reported payroll numbers, KC Fed President Schmid shrugged off the massive miss, and said it didn’t really change the broad strokes of his outlook. He deemed the labor market as relatively strong.

On the chart above, I note the last three NFP releases.  There is clear deterioration, accentuated by lower revisions of the data in both June and July.   The new narrative is that illegal immigrants are adding to jobs through “under-the-table” arrangements, so payrolls are being under-counted.  I suspect it’s pretty tough for a company of any size to pay cash to employees with no benefits.  Is it worth the risk?  My guess is that the undercount is not relevant with respect to trend.  And if I’m wrong, using lower cost labor is clearly deflationary. 

The chart below shows the same SOFR spread on a rolling basis, along with the greenback (DXY).  So, while the spread is currently represented by SFRU4 to SFRH5, before mid-June it was SFRM4 to SFRZ4, etc.  Over the admittedly short time frame of the past year, the spread and DXY are well correlated.  Both DXY and the calendar made new lows Friday.  DXY has plunged from 106.05 to 100.72 just since the end of June, though $/yen at 144.37 hasn’t quite taken out the early Aug low of 144.18.   

Takeaways from the above are 1) there is currently a LOT priced for near-term easing.  2) following expected aggressive easing, the rate of change slows significantly.  While U4/H5 is -120.5, the next 6-mo spread, H5/U5 is -48, and then U5/H6 is -16.  3) if easing is currently being priced too enthusiastically, the dollar will likely stop declining. 4) markets are quite volatile.

The most important news of this week will likely be PCE prices on Friday.  Q2 GDP revision is Thursday.  On a yoy basis, both PCE prices and Core are expected to be 1/10^th higher than last, at 2.6% and 2.7%.  Keep in mind, the payroll data has now become more important.  Next NFP is 5-Sept.  Currently expected 155k.  If one has a conspiratorial bent with respect to data massaging, this report will be a big one. 

Note that Oct FF settled 9501, up just 2.5 bps on the week.  Current Fed Effective is 5.33%.  A cut of 25 is 5.08% (9492) and a cut of 50 is 4.83% (9517).  The midpoint is 9504.5, so the market leans slightly towards just 25 at the September 18 FOMC. (Btw, on Aug 5, FFV4 settled exactly at 9517). Payrolls will likely be a deciding factor.  April 2025 is a “clean” FF contract in that there is no FOMC in that month.  Similar in price to SFRH5 it’s 9628 or 3.72%.  Obviously FFJ5 will adjust like any other contract to NFP.  But just for fun, let’s say the Fed only goes 25 in Sept, but FFJ5 remains around its current price.  That would mean FFV4 settle 9492 with FFJ5 still 9628, a difference of 136 bps. There are four FOMCs in that period: 7-Nov, 18-Dec, 29-Jan and 19-March.   Fifty bp cuts are coming.  But if you think the max move by the Fed will be increments of only 25, then FFJ5 is too damn high!  Same with SFRH5.

	8/16/2024	8/23/2024	chg
UST 2Y	406.2	391.0	-15.2	wi 387.3
UST 5Y	376.2	364.7	-11.5	wi 3.623
UST 10Y	389.0	379.9	-9.1
UST 30Y	415.1	410.1	-5.0
GERM 2Y	243.3	237.4	-5.9
GERM 10Y	224.7	222.5	-2.2
JPN 20Y	169.0	170.1	1.1
CHINA 10Y	219.0	215.5	-3.5
SOFR U4/U5	-155.5	-168.5	-13.0
SOFR U5/U6	-22.0	-19.0	3.0
SOFR U6/U7	3.0	7.0	4.0
EUR	110.20	112.11	1.91
CRUDE (CLV4)	75.54	75.54	0.00
SPX	5557.74	5634.61	76.87	1.4%
VIX	14.70	15.86	1.16

Powell at Jackson Hole

August 23, 2024
*******************

–Yields rose with tens up 8.4 bps to 3.86%.  In yesterday’s note, I mentioned that SFRH5 and M5 were the stars, both rallying 10 bps on Wednesday.  Those moves were reversed yesterday: H5 fell 10.5 to 9620.5 and M5 -11 at 9650.  Positioning is predicated on Powell’s Jackson Hole comments, which occur today at 10:00.  A link to the KC Fed is below, for viewing of Powell’s speech.  

–KC Fed President Schmid, in an interview yesterday with Steve Liesman, noted that the labor market is still relatively strong and there’s “more work” to do with respect to inflation.  Clearly there are a range of views within the Fed.  Yesterday FFV4 settled 9498, edging closer to 9492 or 5.08%, which would be the new target on an ease of 25.  Having said that, there is still large buying of SFRU4 call spreads — just in case the Fed cuts 50.  For example, SFRU4 9531.25/9543.75cs 0.5 paid for about 100k. This trade requires high odds of 50 bp cuts both in Sept and Nov.  The high print on August 5 in SFRU4 was 9547.5, though the settle that day (high sett of the month) was 9528.5.  

–It’s three and a half weeks until the Sept 18 FOMC.  A lot can happen, no matter what Powell says, though I expect him to lean towards 25 bps.  If he goes a step further and implies that future eases of 50 are unlikely, I suspect that stocks will have a negative reaction.  Sept treasury options expire today.  TYU4 settled 113-09+.  Peak OI in calls is still the 112 strike with 125k, the 112p settled cab so it’s all intrinsic.  Next highest is 113.5c with 60k open.  Settled 7.  I suspect we’ll pin that strike.  Put open interest is pretty sparse.

.

https://www.youtube.com/KansasCityFed

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.