Leverage works BOTH ways
October 17, 2025
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–I had mentioned the other day that the first red SOFR contract rallied over 200 bps during the regional banking crisis of March 2023 (which ultimately culminated with the SVB bankruptcy). It was an extremely volatile period, (chart attached) but the key point was that the high was over 9700. Same type of price action for Liberation Day, first red went from 9650 to 9725. Currently first red is 9715 (SFRZ5), but FF are 25 lower than they were in April. Suddenly the buys of otm red calls (0QZ 9800c for 1.0) look pretty good.
–Headlines seem to be focused on regional bank stress again, (Zions, Western Alliance) because apparently, charlatan borrowers have pledged the same collateral for more than one loan. And… it’s gone. It’s worth mention that crypto is also under a cloud. I don’t watch much in this space but bitcoin (as of this early Friday note) is through last Saturday’s low, which is 17% off the month’s (all-time) high. Last price <105k. MSTR also at a new low, down 38% from the July high. Diamond hands, meet Dimon warning.
–Yields fell yesterday, with 10s down 7 bps to 3.975. This morning 3.955. I’m looking for 3.79. The late September covered call buyer, 113, 113.5, 114c in total size about 375k appears to be rolling longs into the 115 and 115.5 strikes. Yesterday -42k TYZ 114/115.5cs at 24 covered 113-21, 26d. TYZ 115.5c rose 39k in open interest to 82k, settled 17. I roughly calculate 115.5 strike to be 3.80% or slightly lower.
–Yesterday Optiver made a note of TY skew / demand for calls. Currently, with TYZ 113-29+, the 112.5p is 14/15 (-21d) while the 115.5c is 19/20 (+24d)
–It’s not all driven by financial markets (though a meltdown will surely trickle through to consumer spending… like a tsunami). The clip below was on Dave Lutz’ note from Jones Trading:
Shut out of full-time work, many jobseekers appear to be doing the next best thing and hunting for a holiday season gig, according to research from the job search platform Indeed. Searches for seasonal jobs were up 27% at the end of September compared to a year ago, and surged 50% from 2023, according to Indeed. The outsize demand from jobseekers compares with only a modest 2.7% pickup in seasonal job postings from employers, suggesting even temporary holiday roles will be hard to come by.
What’s in YOUR private credit book?
October 16, 2025
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–It’s sort of like a Samuel L Jackson Capital One credit card ad: “What’s in YOUR wallet?” Except that it’s Jamie Dimon asking “What’s in YOUR private credit portfolio?” And his answer is, when you see one cockroach, there’s usually more. From Dimon: “These are very smart players: they know what they’re doing, they’ve been around a long time. But they’re not all very smart. And we don’t even know the standards of other banks [that] are underwriting to some of these entities. And I would suspect that some of those won’t be as good as you think.”
–US yields pushed a bit higher yesterday with tens +2.5 bps to 4.044%. Implied vol smothered. The big covered call buyer’s last synthetic straddle buys at the end of September were 113 strike for 1’54 (bought 113c for 46 vs 112-19). Yesterday TYZ5 113^ settled 1’27 vs 113-075. On Friday TYZ 113^ was 1’41. Almost certainly there have been some adjustments, for example a seller yesterday (roll) of TYZ 113.5/115c 1×2, settled 12. The theme, in my opinion, is to bring markets back to a more normal and stable state (lower vol, ten year yield hugging the Fed Effective rate, stocks shaking off weakness and trying to press VIX down) but the underlying foundation is riddled with fault lines. Bitcoin is the latest tremblor.
–Ten year treasury vs TIP breakeven continues to slip, notching a new recent low 230 bps. CLZ5 settled 57.84 its lowest close since May. (Time to fill up the SPR). Focus now shifting to Venezuela and Maduro. Bessent comments yesterday indicate serious issues continue with China. A Doomberg piece this morning warns that China’s rare earth clampdown is likely to reverberate through supply chains; a bigger deal than is being generally acknowledged.
–Several Fed spreakers today. Miran continues to argue for lower rates, and certainly the market is signaling acceptance. I believe Philly Fed Mfg will be released, expected 10 from 23.2.
Pre-set path… with a kicker
October 15, 2025
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–Yields continue to grind lower. TYZ5 settled 113-13, +8/32, with cash 10s 4.019%. USZ5 settled 118-09, +11/32 with 30s marked at 4.621%. SOFR contracts +0.5 to +1.5, with SFRZ6 and SFRH7 tied for peak contract at 9705 or 2.95%. Trade of the day was a new buyer of >100k 0QZ5 9800c (initial +80k on block for 1, then some slightly higher). These expire 12-Dec 2025, SFRZ6 underlying.
–November FF settled 9614.5 or 3.855%. Current Fed Eff is 4.10, so FFX is 24.5 lower in yield, fully pricing a 1/4% cut at the October FOMC. FFF6 settled 9640 or 3.60%, exactly 50 bps below current Fed Effective (good size buyer yesterday at 9640.5). Central banks like to say they’re not on a “pre-set path”, but the short-rate futures markets have clearly set the next two meetings for 25 bp cuts.
–However, the FF target isn’t the only Fed tool, as Powell said yesterday. From the speech:
Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision.
The end of balance sheet run-off reflects slightly easier stance; perhaps the gold market is taking that factor into account as it soars to new record highs. Currently 4223/oz, up 59.60 as of early morning Wednesday.
Also from the speech:
Research and experience tell us that asset purchases affect the economy through expectations regarding the future size and duration of our balance sheet.
–Stopping asset sales will have a similar effect, of course. The market is priced for FF cuts already; the end of balance sheet run-off will be an additonal ease.
–I had mentioned 0QZ 9800c in my weekend note. Currently 0QZ5 9750c are 3.75 (ref 9705), so an immediate 50 bps surge in SFRZ6 would see the 9800c go from 1 to at least 3.5 and likely ~ 5.5 given a vol kick. I had also mentioned 0QX5 9737.5c for 3.0, those settled 2.5 yesterday. Both the SVB bankruptcy in March/Apr 2023 and the yen-carry turmoil of Aug 2024 saw rallies > 50 bps in the first red in short order. Something comes out of left field almost EVERY day now. A little insurance isn’t a bad idea.
and….Bears win
October 14, 2025
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–Yesterday’s highlight was the Monday Night Football fabulous rendition of the National Anthem by Generald Wilson!
The National Anthem will be performed by retired Navy Petty Officer First Class Generald Wilson, a premier National anthem soloist known for his powerful renditions at major sporting events across the country—including previous Commanders games.
–Market action was confined to a quiet back and fill, with implied vol in rates marked significantly lower after Friday’s pop. TYZ5 113^ settled 1’41 Friday vs 113-04+, but down at 1’34 yesterday vs 113-050. Precious metals remain on fire with GCZ5 4133.0 and SIZ5 50.43 (yesterday settles; higher this morning).
–Today Powell speaks on the Economic Outlook at 12:20, though renewed tensions in China/US trade relations may overshadow Powell’s summary. Bowman (morning) and Waller (afternoon) also speaking on discussion panels. Stock futures starting off on the back foot with ESZ 6638.0, down around 56
–NFIB small business optimism just released at 98.8 from 100.8. (Still above long term average). This survey was from September, prior to the shutdown. “Supply chain and inflation issues stood out as a key problem in the report.”
Gold and Silver indicate stress is still present
October 13, 2025
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–I guess it was inevitable that Trump would backtrack from initial China threats with SPX -2.7% on Friday. While stock futures have had a nice bounce this morning, with ESZ5 up around 90 (6682 last), red SOFR contracts are only down 1 bp from Friday’s gain of 9.5 to 10. Peak contract is SFRH7, now printing 9700 from 9701s Friday. Bitcoin has recovered Saturday’s plunge, but is only back around Friday’s low ~115k. The star is Silver, with SIZ5 49.90 up 2.63 and cash over $51/oz. Gold is also at new highs, with GCZ5 4099, +98.60 on the day.
–Risk controls and margins likely to tighten up. Powell speaks tomorrow at 12:20 on the economic outlook (a bit cloudy?) with Waller on a discussion panel in the afternoon at 3:25 re: Payments (just tack it on to the back-end using PIK). CPI has now been scheduled for October 24, one week from Friday. While stocks are open today, the cash bond market is closed.
–Perhaps worth noting is that the 10y breakeven, (treasury – tip) ended at a slight new recent low of 232 bps Friday. The inflation outlook appears more dependent on the direction of stocks rather than tariffs. The high of the year was in February at 247 bps, and the Liberation month of April saw the low print of 217. Friday’s level is right in the middle.
Rare Leverage
October 12, 2025
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The camera pans over a crowded investment conference cocktail party. A sonorous voice asks in near disbelief, “How could all of these sophisticated investors not have seen the warning signs of over-leverage and fraud?”
The broad answer of course, is that some DO see it and actively participate. Really sophisticated ‘investors’ get the info just a little bit before everyone else. It helps. For example, there are reports of heavy short sales of both bitcoin and ether right before Trump’s ‘100% tariffs on China’ announcement on Friday with covers right after the tweet (reported $190m profit). Thanks for link NS.
https://www.youtube.com/watch?v=5fTv9ThJg6U
Thunder clouds are now rolling in threatening forced exits and diminished liquidity. Obviously apparent in crypto, where Bitcoin traded to a record high 126k on Monday, but plunged to around 103k on Saturday, a move of nearly 20% in a week (15% on Friday alone). Ethereum tanked over 25% in the same time period but is still above its 200 dma. (As of this note on Sunday Bitcoin is just above its 200 dma of around 107k). The other related aspect is one of due diligence concerning private credit/equity deals. First Brands bankruptcy highlights lax standards, which will now likely tighten up like a barbed cilice.
Two weeks ago (Ghost of Burns) I mentioned the weak price performance of private equity companies KKR, APO, BX, OWL. All had miserable action on Friday with OWL at the lowest close of the year (below the lowest Liberation Day close) and APO nearing that low (closed 118.22, 4/4 low was 108.68, intervening high in July was 156). I also noted that XBT/XAU (bitcoin gold cross, then at 29) looked vulnerable to a lower break, which of course occurred on Friday. Now at 27.8, it looks like it might test the April low just above 25. (when XBT was 79880 and XAU was 3176).
The government shutdown is causing angst over the release of timely economic data, but what is currently reflected in market prices is probably all we need to know. For example, China’s new restrictions on rare earths should have an immediate effect on supply chain pressures, but it probably won’t show up in the NY Fed’s Global Supply Chain Pressure Index for some time. Anduril founder Palmer Luckey is forcefully arguing for the US to move away from China supply chains (which is likely inflationary at the margin). https://www.youtube.com/watch?v=Z369Ug6b83w
Interesting quote: “Most of our best talent…contrast this to the Cold War, is no longer working on nat’l security problems, but is working on things like advertising optimization, on new apps, on tools of entertainment rather than tools of deterrence. And I’ve seen that reversing.”
Here’s NY Fed Supply Chain Pressure. It surged during Covid. How will a suspension of rare earths impact supply chains in general?
https://www.newyorkfed.org/research/policy/gscpi#/interactive
In my opinion it won’t be easy to reverse Friday’s damage in stocks due to continuing erosion of the administration’s credibility. Even with softened rhetoric, consumer and business confidence is likely to fray further. So, I think the Liberation Day sell-off (sans the subsequent rally) is the proper template. SPX low print in April was 4835 (start of the year was around 4745). Friday was 6552.
The Liberation low print in SPX was ~21% below February’s high, and about 16% below the late March high (immediately prior to the April 2 Liberation Day tariff announcement). From Thursday’s close of 6735, 16% lower is 5657 and 21% is 5321. The 100 dma is 6327 and the 200 day is 6050. At the very least I would say the 200dma should be tested, which is about 7.5% lower than Friday’s close.
The peak SOFR futures contract is SFRH7 at 9701. High tick in that contract just prior to the September 17 ease was 9719.5. SFRH7 is now the second red. In the Liberation turmoil, the second red traded as high as 9728, though the high settle was 9693.5. The highest settle for the second red on April 30 (SFRU6 at that time) was 9706. The high in the red pack in April was 9702. Given the 25 bp ease in September and expected 25 bp cut in October, 9750 should be an easy target for reds if stocks continue to break.
The 10y yield ended Friday at 4.048%, about 4 bps below EFFR and 10 below the SOFR rate. On April 4, low in 2y was 3.655, now 3.518. Low in 5y was 3.71 now 3.642. Low in 10s 3.997, now 4.048. 30s 4.411, now 4.63. So shorter maturities are below April’s lows, but longer maturities are not…yet. If 10s move below 4% then 3.79 should be a target. That was the initial low related to the yen-carry trade in August 2024. At the time, the front TY contract traded over 115 (TYZ5 settled 113-045 on Friday).
Themes are 1) tighter credit 2) national insularity that can feed into higher inflation, and 3) a shift to guns rather than butter. The question now is whether the Fed will choose to focus on incipient price pressures (Logan) or on liquidity and wealth effect concerns (Miran)
Powell speaks on Tuesday on the Economic Outlook. Miran on Wednesday. Beige Book Wednesday afternoon. Fed’s communication blackout on October 18.
OTHER THOUGHTS/ TRADES
Both VIX and MOVE perked up last week. MOVE put in low of 69.5 on October 3 but ended Friday 81.65. It’s been in a downtrend since the April spike up to 140. Excluding any adjustments which may have occurred, the large covered call buyer in TYZ5 is getting close to flat after suffering the vol grind lower.
I have included a summary of Dec TY covered calls that had been accumulated in the latter half of September. Again, this is not necessarily inclusive, and doesn’t assume any adjustments. However, the changes from last Friday, October 3, to October 10 settles are somewhat enlightening. Shown at bottom
Summary of TYZ covered call buys (not sure this is a complete list, added the 113c 9/30):
Monday 9/22:
+50k TYZ5 114.0c covered 112-275, 31d price 33
+50k TYZ5 114.0c covered 112-255, 29d price 32
+25k TYZ5 114.0c covered 112-240, 28d price 31
Tuesday 9/23:
+50k TYZ5 114.0c covered 112-250, 29d price 31
Thursday 9/25:
+50k TYZ5 113.5c covered 112-215, 35d price 38
+50k TYZ5 113.5c covered 112-210, 35d price 38
+20k TYZ5 113.5c covered 112-090, 18d (only) price 32
Tuesday 9/30
+50k TYZ5 113.0c covered 112-190, 42d price 46
+25k TYZ5 113.0c covered 112-220, 45d, price 49
Friday’s settles, Oct 10, 2025: (Dec options expire 21-Nov)
TYZ5 113-045
TYZ5 113.0c 57
TYZ5 113.5c 43
TYZ5 114.0c 32
| 10/3/2025 | 10/10/2025 | chg | ||
| UST 2Y | 357.0 | 351.8 | -5.2 | |
| UST 5Y | 370.6 | 364.2 | -6.4 | |
| UST 10Y | 411.7 | 404.8 | -6.9 | |
| UST 30Y | 471.2 | 463.0 | -8.2 | |
| GERM 2Y | 201.5 | 195.7 | -5.8 | |
| GERM 10Y | 269.7 | 264.3 | -5.4 | |
| JPN 20Y | 261.1 | 270.8 | 9.7 | |
| CHINA 10Y | 185.9 | 184.7 | -1.2 | |
| SOFR Z5/Z6 | -62.0 | -64.0 | -2.0 | |
| SOFR Z6/Z7 | 11.0 | 11.0 | 0.0 | |
| SOFR Z7/Z8 | 19.0 | 18.5 | -0.5 | |
| EUR | 117.42 | 116.06 | -1.36 | |
| CRUDE (CLZ5) | 60.53 | 58.48 | -2.05 | |
| SPX | 6715.79 | 6552.51 | -163.28 | -2.4% |
| VIX | 16.65 | 21.66 | 5.01 | |
| MOVE | 69.53 | 81.65 | 12.12 | |
Cui Bono
October 10, 2025
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“To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.” -Warren Buffet
I don’t really think Argentina is a one-foot hurdle, but that didn’t stop the US Treasury from directly buying pesos to save Milei, or rather to save the Dead Cow, (Vaca Muerta LNG/shale development). More on that in another note…
–SOFR and treasury futures trading remains fairly quiet, though the Fed Effective setting moving up another 1 bp to 4.10% set off a flurry of FF vs one-month SOFR spreads. For example, FFX5 settle 9613.5, -0.5 while 1m SOFR SERX5 settled unch at 9607.5, spread of 6 (FF volume 100k and SERX 70k). Not much change following the 30y auction. Tens up 1.7 bps to 4.144%. SOFR contracts unch’d to -2.0 out to blues.
–Below doesn’t really have a direct impact on markets, but is still interesting:
First, an X-post by @AllVentured
‘We are quite literally taxing poor Americans via their power bill to subsidize AI cat videos’
Not so fast, Friskers. There’s a great story on ZH about community opposition to data centers bringing people of different views together. The below concerns a proposed Google project near Indianapolis:
But in the weeks leading up to that vote, Franklin Township neighbors began to organize. Neighbors of all backgrounds—farmers, homeowners, parents, retirees—organized across political lines. They put up yard signs, and launched a Facebook group that quickly drew hundreds of members and launched a resident petition that gathered 7,600+ signatures. They wrote and called their council representatives, and word spread through churches, schools, and community meetings. By the time of the final hearing, the chamber was packed wall to wall with residents, standing shoulder to shoulder in opposition. They had packed City Hall so tightly that the chamber was standing-room only.
District Councilor, Michael-Paul Hart told reporters for More Perfect Union who were present on the night of the vote, “In my six years on the council, I’ve never seen all the rooms filled to the max with people waiting in the lobby. I’m overjoyed by the amount of community support that came out for this.” One local resident said: “This was do or die. We came prepared to fight with everything we have against this data center.” “I’ve been hoping that something would bring us together,” said a community organizer. “And it looks like data centers are.”
https://www.zerohedge.com/energy/americas-growing-pushback-against-data-centers
From a local news outlet:
People against the project cite not enough jobs, power and water strain and no tax benefit.
Could the Fed Cut 50 in October?
October 9, 2025
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–Not much worth noting in rate futures trading, aside from continued accumulation of call spreads based on SFRZ5 trading above 9650 (or higher). For example, more buying of SFRZ5 9650/9662.5cs for 1.25. SFRZ5 9650c have whopping 878k in open interest relative to 1.5m in Z5 futures, and settled 2.25 with 0.19d, ref Z5 9632s. In the September cycle, the (initial) call spread which was bought in huge size was SFRU5 9612.5/9625; ultimately went out worthless.
–Ten year yield nearly unch’d at 4.127%. Twos rose 1.4 to 3.582%. Thirty year auction today, closed at 4.722% yesterday.
–What could put the Z5 9650 calls in play? There are three weeks until the next FOMC on Oct 29. Nov Fed Funds at 9614 currently price high odds of a 25 bp cut at that meeting. (FFX5 rate is 3.86 vs current EFFR of 4.09, a difference of 23 bps). Anything on the three-week horizon that could shift expectations to 50? Nothing in yesterday’s release of the minutes is suggestive of a large risk. If anything, concerns about inflation have picked up.
Perhaps a stretched gov’t shutdown could be the spark. Is the First Brands bankruptcy a possible catalyst? Probably not, but it seems to be getting larger by the day. ZH reports “…an investigation into the car parts group’s off-balance sheet financing is examining whether collateral underpinning its financing was pledged “more than once” and “commingled” between lenders.” DOH!
This sort of circular financing and vendor finance is currently a hot topic as it relates to the AI boom. But nothing can stop that, right? Except maybe China shutting down rare earth exports, which they seem to be in the process of doing right now. From CNBC: “China has tightened export controls on rare earths and related technologies while barring its citizens from participating in unauthorized mining overseas, adding fresh strains to a sector central to its geopolitical leverage.”
Dude, rather than a $50 billion investment can you get your hands on some dysprosium and terbium?
On a more mundane topic, Redfin reports that “Roughly 56,000 U.S. home-purchase agreements were canceled in August, equal to 15.1% of homes that went under contract that month. That’s up from 14.3% a year earlier and marks the highest August rate in records dating back to 2017.”
https://www.redfin.com/news/home-purchase-cancellations-august-2025
–It’s all dependent on stocks holding up. Vincent Deluard, Director of Macro Strategy at StoneX mentioned in a presentation yesterday that capital gains are about 10% of individual tax receipts for the gov’t, a significant source of income. A loss of capital gains income can set the entire process in reverse.
Gold on the Ceiling
October 8, 2025
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–Yields eased yesterday with 10s down 3.5 bps to 4.125% in front of today’s auction. Fed Effective has been 4.09% so 10s are hugging that level. SOFRRATE 4.15% on Monday. 30 year auction tomorrow. 30y yield fell 3.3 bps to 4.724%. Treasury vol probing new lows. Peak SOFR contract SFRH7 was +3.0 at 9595.
–Even though SOFR futures were drifting a bit lower early yesterday, there were additional call spread buyers on SFRZ5. From Art Main at TJM:
+25k SFRZ5 96.50/96.625 call spread (10k 1.25’s covered 96.35/.355 delta .05) from 1 to 1.25 (position add ~140k)
+12k SFRZ5 96.625/96.6875 call spread covered 96.30 delta .05 at 0.25 (position add ~70k)
+10k SFRZ5 96.625/96.75 call spread at 0.5 (position add ~20k)
+15k SFRZ5 96.4375/96.50/96.5625 call fly at 0.25
–All of these require MORE than 2 more 25 bp cuts. Current EFFR 4.09. Cut 50 leaves it 3.59 or 96.41. Jan FFs (FFF6) are nearly there at 96.37. SFRZ5 is 9632.5.
–It’s all about gold now. A move >1%, like this morning, adds over $270 billion to market cap (estimated at $27T). Almost enough to buy Chevron ($317b mkt cap).
They wanna get my
They wanna get my gold on the ceiling
I ain’t blind, just a matter of time
Before you steal it
–Black Keys
Maybe a little caution?
October 7, 2025
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–Tens up 4.3 bps to 4.16% Monday in slow trade. New highs in stocks, bitcoin, gold. However, a yellow flag warning for unrepentant bulls in Applovin (APP) as the stock plunged 14% late with the SEC said to be investigating data collection practices. Huge range 664 to 545, closed 587.
–Vol continues to compress to new lows in treasuries. TYX5 112.5^ was sold 4.5k at 56; settled 0’55 ref 112-125, vs 1’11 the previous Monday ref 112-165. TYZ 112.5^ went from 1’51 to 1’33 on the week (4.8).
–Consumer Credit is a Fed number and likely to be released. Last at +$16b and expected +14b, but various factors like the end of electric vehicle credits and consumers running out of money might have pulled credit demand forward.
–News highs in a couple of the near SOFR one-yr calendars. For example, SFRH6/H7 settled -40, +1.5 on the day (9652.0/9692.0). Low in early Sept -55.5. The first six months of this spread is SFRH6/U6 which settled -34.5 (9652/9686.5), while U6/H7 is only -5.5 (9685.5/9692). I have been focused on H6/U6 as it brackets the end of Powell’s chairmanship in May. The original thought was that BIG eases might come over this time period, but the market is obviously fearful of inflation and is paring back the idea of aggressive forward easing (red pack settled -3.5). SFRH7 is the peak point on the SOFR strip (now tied with Z6 at 9692). I would bet that we see 9722 before 9662; I would be inclined to fade the strength of near calendars.
–Student loan debt is one of the largest assets of the US gov’t at around $1.7t. It’s a receivable that’s not likely to be received in full. Given the clumsy efforts of the Biden admin to dismiss this debt, I’m not even sure if that matters. But renewed collection efforts and garnishments are likely to cast a cloud on consumer spending.
–Bowman at 10:05 and Miran on a discussion panel at 10:45.
