Zelensky et al today. Still has a bad hand.
August 18, 2025
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–Yields a bit higher Friday with 10s +3.3 to 4.324%. For the past six months the ten year yield hasn’t deviated from the Fed Effective rate of 4.33% by more than about 17 bps either way, except for April’s Liberation day volatility, when the 10y yield briefly touched 4%, or 33 under. Since February, 10y has been betwen 4.62 and 4.00. Since May, between 4.60 and 4.15. Retal Sales about as expected (+0.5) with positive revisions. Import Prices were +0.4% vs 0.1 expected.
–2/10 edged to a recent new high at 56.7 bps, up 1.1 bp. 5/30 up to 108.1, a new high for the year, the low having been in February at 34. The 30y bond yield has been above EFFR all year, with the highest spread being 76 bps in May with 30y yield 5.09%. On the SOFR strip the lowest quarterly contract is SFRU5 at 9590, and the peak contract is SFRH7 at 9690, exactly 100 bps apart over 1.5 years.
–Zelensky summit today in Washington. FOMC minutes Wednesday, Philly Fed Thursday, Powell at Jackson Hole on Friday, coinciding with Sept Treasury option expiration. Current TYU5 is 111-25+ and 111.75^ is 34/64s which seems slightly cheap. (~ 8 bps).
–In the curiosity column, bitcoin is testing 115k this morning, considerably lower than last week’s ath 125k. As I have the chart drawn, the current price is below the upward sloping trendline which has been in place since the April low.
Industrial Disease
August 17, 2025 – Weekly Comment
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Mark Knopfler identified problems afflicting the current administration as early as 1982:
Yeah, now the work force is disgusted, downs tools, walks
Innocence is injured, experience just talks
Everyone seeks damages, everyone agrees that
These are classic symptoms of a monetary squeeze
On ITV and BBC they talk about the curse
Philosophy is useless, theology is worse
History boils over, there’s an economics freeze
Sociologists invent words that mean “industrial disease”
–Dire Straits – Industrial Disease
Bessent with Larry Kudlow on August 12:
We have these agreements in place where the Japanese, Koreans and to some extent the Europeans will invest in companies and industries, that we direct them, largely at the President’s discretion.
Taking a stake in MP and Intel is just the start.
It was probably in 2013 or 2014 when then Chicago Mayor Rahm Emanuel created the Chicago Infrastructure Trust. I had heard an interview at the time (I can’t find it now) where he said, government doesn’t create jobs. Gov’t invests in infrastructure and creates conditions that encourage private companies to grow and hire.
It appears the fed’l government will choose winners and losers both through direct investment and contract awards. I favor Emanuel’s philosophy, but I think there’s a risk that the bond market reflects concerns about the new regime by pressing to higher yields. Perhaps it’s no wonder that BBB/Baa spread is just 1%, matching the lows of the last five years, also the low since 2003, farthest BBG goes back. Why should there even be a spread? It’s the same rate.
The extra yield that investors receive for owning investment-grade corporate bonds instead of Treasuries shrunk to just 73 bps Friday, the lowest since 1998, according to Bloomberg index data.”
To a small extent (so far) the steepening curve is a signal of these dynamics. 2/10 closed 56.7 (3.757/4.324) essentially the highest level since the spike to 64.5 around mid-April (Liberation Day aftermath). 5/30 at 108 (3.843/4.924) is highest since Oct 2021 and 2/30 at 116.7 (+7.2 on week) is highest since January 2022. I’m starting to think that every time Trump makes an off-the-cuff policy pronouncement the long bond yield rises by a few bps. The 2021 high in 2/30 was 228 bps (now 117). Of course, that’s when 2’s yielded 15 bps and the long bond was 2.45%. Currently twos are about 57 bps lower in yield than current EFFR at 4.33. Before the last Jackson Hole meeting the spread was -130 to -140. That is, the 2y was around 4% with EFFR at 5.33%. By the time of the last Fed ease in December 2024 to 4.33%, the 2y had risen to the same level, around 4.3%. Clearly the market expects easing now, but less aggressively so.
At the last Jackson Hole meeting, Powell was explicit about easing:
The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.
We will do everything we can to support a strong labor market as we make further progress toward price stability. …The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.
The following chart was a part of the slide deck at the last J-Hole presentation. Hiring rate vs Quits.
There is plenty of cover for Powell to ease 25 at the next FOMC. Funds are above neutral. Any uptick inflation can be explained away as a ‘one-time’ tariff response. Labor conditions are softening. All Powell has to say is that the Fed is taking a small step towards bringing policy closer to neutral as an insurance policy against weakening labor conditions at a time of AI angst. The Fed talks a lot about the importance of inflation expectations. How about job expectations? The next chart is from U of Michigan. If the next employment report is awful, then a 50bp cut could occur.
Last week FFV5, which telegraphs odds of the Sept FOMC, traded between 9596.0 and 9588.5. Settlement was 9589.5 after the higher than expected PPI data. A price of 9592.0 represents certainty of a 25 bp ease. We traded a few bps either side, but ended with a slight lean closer to zero than 50. FFF6 which is a rough proxy for the end-of-year rate traded a high 9633.5 and a low 9621 with a final settle 9622.5. A price of 9592 is one ease, 9617 is two, 9642 is three. So at the end of the week, Jan FF is closer to two rather than three.
Not a lot of economic news this week besides FOMC minutes Wednesday. Powell’s Jackson Hole speech scheduled for Friday at 10:00 am.
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The gold window closed August 1971. But it was Nov 1972 to June 1973 when gold doubled from $62 to 120. Just prior to the 1973 oil shock.
In Nov 1972 SPX was 116.52, on its way to closing out a strong year. Nixon was re-elected in Nov 1972. By June 29, 1973 SPX was 104.26.
Is Bessent going to revalue gold to ‘strengthen’ the Fed’s balance sheet? Here’s chart of SPX priced in Gold. Looking at buying wingy calls on GCZ5.
| 8/8/2025 | 8/15/2025 | chg | ||
| UST 2Y | 375.8 | 375.7 | -0.1 | |
| UST 5Y | 383.0 | 384.3 | 1.3 | |
| UST 10Y | 428.3 | 432.4 | 4.1 | |
| UST 30Y | 485.3 | 492.4 | 7.1 | |
| GERM 2Y | 195.2 | 197.0 | 1.8 | |
| GERM 10Y | 268.8 | 278.7 | 9.9 | |
| JPN 20Y | 250.8 | 256.1 | 5.3 | |
| CHINA 10Y | 169.6 | 174.3 | 4.7 | |
| SOFR U5/U6 | -88.5 | -90.5 | -2.0 | |
| SOFR U6/U7 | -1.0 | -2.5 | -1.5 | |
| SOFR U7/U8 | 21.5 | 24.5 | 3.0 | |
| EUR | 116.43 | 117.05 | 0.62 | |
| CRUDE (CLV5) | 63.00 | 61.98 | -1.02 | |
| SPX | 6389.45 | 6449.80 | 60.35 | 0.9% |
| VIX | 15.15 | 15.09 | -0.06 | |
| MOVE | 79.20 | 76.66 | -2.54 | |
https://www.governing.com/archive/gov-chicago-infrastructure-trust-build-up.html
https://www.foxbusiness.com/video/6376845663112
High Prices
August 15, 2025
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–Shocking PPI data caused a back-up in yields. PPI up 0.9% m/m and 3.3% yoy. Ex-food and Energy +3.7% yoy. Tens rose 5.5 bps to 4.291%. On the SOFR strip, SFRH6 was weakest, falling 7 to 9646.5. FFV5 fell back below a 25 bps ease, settling -3.5 at 9591. (9592 represents certainty of a 25 bp cut, so the idea that PPI data might derail a rate cut is NOT currently being priced).
–Even with the change in tone, another 25k SFRU5 9612.5/9625cs were bought, paying 1.375. SFRU5 settled 9593.0. This position is >200k with open interest 650k and 550k respectively. Something bad about the next payroll report? Another interesting trade: buyer of 30k SFRM6 9850c (3.0s vs 9668.5) with SFRU6 9862.5c (3.5s vs 9683.5) for 6.5. It’s not that the Fed needs to cut to 1.5%, but a negative economic or geopol outlier can easily juice up wing vol.
–Trump/Putin summit, though the possibility of a breakthrough seems slim and has been downplayed.
–Bessent said the US was not looking to acquire more digital assets, (or wants to acquire in ‘budget neutral’ ways). In any case, bitcoin had a huge range, early new high at 124,514. Low as of futures settle 117.233. Big outside reversal day, but as we’ve seen recently, the machines don’t necessarily view that as a directional signal. MSTR near 373 after having been up to 450 last month, but this looks like a support area. BTC currently 118900.
–News today includes Retail Sales expected 0.6%, ex-auto and gas 0.3% expected vs 0.6% last. Industrial Production expected 0.0 vs 0.3 last. UNH up 12% post-close as Warren Buffet was disclosed as a buyer. INTC up over 10% between yesterday and this morning as Trump expressed an interest in taking a stake. I wish that was a joke, but it’s not.
–Weak China data (from CNBC). Retail Sales +3.7% sharply missing analysts’ estimates for 4.5%. Ind Output +5.7%, weakest since Nov of last year. Fixed asset investment 1.6% this year as of July, slowing from 2.8% in the first six months.
–Below is a chart of US Retail Sales, CPI adjusted. Previous horizontal periods appear consistent with recession, though it can be argued we’re just getting back to trend following covid.
When they’re giving you 25, push for FIFTY
August 14, 2025
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–Rate futures bid as Bessent calls for Fed cuts, looking for 50 at the Sept meeting. Current EFFR is 4.33, a cut of 25 would be 4.08 which is a price of 9592.0. Early in the session FFV5 (Oct Fed Funds) traded 9593 (meaning the market is pricing in just a little MORE than a 25 bp cut in Sept). FFV5 settled at 9594.5. Today’s news includes PPI and Jobless Claims…my focus will be on continuing claims which have been steadily rising, last at 1.947m. (Jobs are hard to get). In terms of PPI, oil is again nearing $60/bbl and is at the bottom of 2 month range, Copper tumbled, grains at lows.
–There were 2 dissenters at the last FOMC, Waller and Bowman. If Miran votes that will be three, but I can easily see an internal six/six tie. Clearly, Powell would cut, but there’s a chance it would be a hawkish 25, couched as a simple insurance policy against labor market weakness. Of course, another bad NFP could easily spark 50.
–Large trades continue on SFRU5 calls. Now a buyer of 10k 9625/9637.5cs for 0.25. SFRU5 settled +3 at 9597.0 (NOTE this is above FFV5). Also a buyer of 10k 9612.5/9618/9625c fly for 0.5. Perhaps of more interest would be SFRZ5 pricing and ultimate settle. With current EFFR at 4.33 or 9567, a total of 75 bps between now and year end would put EFFR at 3.58 or 9642.0. FFF6 settled 9632, or 10 bps away, while SFRZ5 settled 9630.5. Of course, the 28-Jan FOMC odds figure into SFRZ5 pricing, not so much FFF6. Clearly, there’s upside room for SFRZ5, especially if the huge option bets in SFRU5 for a 50 bp cut at the 17-Sept FOMC come to fruition. Yesterday there was a buyer of SFRZ5 9618.75/9643.75c 1×2 for 1.5. Not sure I would care for an extra short leg at that strike. Trump has downplayed the outcome of his summit with Putin, but has also threatened serious consequences if there’s no progress. Geopolitical failures could still spur a bid for short dated treasuries & SOFR contracts.
–Reasonable downside play yesterday, buyer of SFRV5 9618.75/9606.25/9593.75p fly 1x3x2 for 0.25. Settled 0.5 vs 9630.5. In my opinion, 9606.25 strike is a reasonable lower limit for SFRZ5 at this point.
–Yesterday, 2s fell 4.4 bps to 3.685 and tens fell 5.7 bps to 4.236, 30s surprisingly strong, down 5.8 bps to 4.826%.
–Interesting clip from Matt Taibbi regarding Trump’s executive order to allow Private Equity in 401ks. It’s the first I have heard about Intel situation. In any case University Endowments are trying to unload PE to pay fines; this is an elegant way to have the retirement system bail out higher ed. Everybody wins?
The order directs the Secretary of Labor Lori Chavez-DeRemer to review and potentially remove the biggest obstacle PE has had in gaining access to 401(k) plans, most notably the plan manager being sued for not performing their fiduciary responsibilities by investing in PE. That’s what happened in 2015 when Intel employees sued the company for what they considered to be lousy returns from PE investments.
–Here’s a clip from DRW (Cumberland) on Linked In: “We’re done talking theory.” Real-time, on-chain financing of tokenized U.S. Treasuries against USDC — executed over a weekend — proves that Digital Asset and the Canton Network blockchain are reshaping markets.
SOFR butterflies and pricing
August 13, 2025
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–CPI about as expected, with yoy 2.7 vs 2.8 exp and Core a bit higher at 3.1. Short end breathed a sigh of relief and greenlit an ease (which had already been substantially priced). SFRH6 and M6 were strongest contracts, both +3.5 to 9649.5 and 9670.5. With EFFR at 4.33 or 9567, SFRM6 is about 100 bps lower in yield. FFV5 settled 9591.5 (24.5 lower than EFFR) so one cut is completely priced. The FOMC after Sept is October 29, so FFV5/FFX5 spread gives a decent market expectation of ease at THAT meeting. Spd settled -15 or around 60% chance of 25.
–There is continuous buying of SFRU5 9612.5/9625cs for 1.375 to 1.5. That trade needs strong perception of a 50 bp ease at the Sept meeting (Bessent at end of day called for 50, maybe HE’S the buyer!). Block trade seller of 45k SFRV5 9618.75/9643.75cs at 10; more than doubled his money, having paid 4.5 for 60k on July 28. SFRU5 open interest was +26k to 1.29m. 9612.5c have 532k open, +77k yesterday.
–So with the front end frothy and inflation as expected but still not near target, long end yields rose. 30y cash 4.884%, +4.4 bps and appears as if 5% is in the cards once again. 2y yield was -2.3 at 3.729% or 60 under EFFR. 5/30 posted a new high (at time of futures settlement) at 106.2.
–ESU5 made an all-time-high. BLS unemployment data caused a bearish weekly reversal, BLS inflation data reversed it. Didn’t check this but saw a post noting that just MSFT and NVDA combined are 15% of total market cap.
–This next part’s not for everyone, but I find it interesting that there are some decent size SOFR butterflies trading again. Yesterday: Seller 40k SFRZ6/M7/Z7 6m butterlfy at -9. Was -10.5/-10 late. Settles: 9690.5/9689/9677, so first spread is 1.5 and M7/Z7 is 12 (-10.5 in fly). My first thought was that we’re back to the Euro$ technique of selling Dec contracts, and as I noted previously Dec 31, 2027 is a Friday so it’s a long year-end ‘turn’. This was a new trade, open interest in the 3 contracts +45k, +114k, +60k. Total SFR OI futures +353k.
–I’ve attached a BBG 6 month calendar spread matrix here.
In an environment of expected HARD easing in the near future, near SOFR calendars sell off, but deferred spreads rise. It’s apparent in the table of 6month spreads: U5/H6 is the lowest at -55.5, but by the time of Z6/M7 we’re +1.0. So, the 6m spread in front of Z6/M7 is U6/H7 and that’s -7. Pretty large six month roll. U6/H7/U7 fly is -15 Again, the sale of Z6/M7/Z7 at -9 would seem to earn effortless carry on natural curve roll. However, even though the market doesn’t fully perceive it, we’re in an environment where the Fed COULD be a slave to sloppy and volatile economic conditions. We have the President calling for 300 bps of instant ease and Bessent asking for 50. Cuts MIGHT come rapidly, and if they do, the back end of the SOFR curve is going to steepen hard. Typically, when the market looks for outsized easing, the peak contract on the strip moves forward. But for now, it’s still in the seventh slot, SFRH7 at 9691.5. THIS IS NOT A RECOMMENDATION, but consider that SFRU6/U7 one-year calendar is only POSITIVE 1 (9684.5/9683.5) while 6m M7/Z7 is +11 at settle (9689/9677). This is now all about the speed and magnitude of easing, and IF it happens fast then it’s likely that a spread like U6/U7 will move to a much more positive value. (That’s why trades like buying 0QU calls vs 2QU calls have found favor…call for ideas and execution).
–Personal story: I am a long-suffering owner of TLRY (pot) stock. In the beginning of July, it was around 30 cents, yesterday it traded 1.20. Should be happy, right? Explosions in these little stocks isn’t particularly healthy in my opinion, but will take it for now. How about sell MSFT and NVDA and buy the S&P 490 for flat? Just kidding, but all sorts of valuations seem somewhat out of whack.
Honest and accurate inflation data
August 12, 2025
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–Light volume Monday. Yields were slightly easier; 5, 10 and 30y down around 1 bp. Tens -1.2 to 4.271%. CPI today expected 0.2 m/m with yoy 2.8% from 2.7% and Core expected 3.0% from 2.9%. Hedges against high inflation data were placed (Friday expiry): TY wk3 111.75/111.50/111.0 p fly 0 paid 12k. TY wk 3 111.5/111.0ps 7 paid 17k. Settles 111.75p 13, 111.5p 7, 111.0p 2 ref TYU5 111-285. There was a large buyer of ~55k TYU/Z roll for 0. Open interest in both futures contracts up a similar amount. Settled 0 with both at 111-285. USU5 112/107p 1×2 3 paid 6k. Settle 5 & 1 ref 115-05.
–Continued buying SFRU5 9612.5/9625cs for 1.5. Over 30k yesterday bringing the total to around 150k. Settled 1.25 vs 9591.5. U5 9606.25/9618.75cs settled 1.5. 9600/9612.5cs traded 2, settled 1.75.
–Trump extended China tariff decision for 90 days.
–Because I had re-posted a recent analyst report regarding Marex (MRX), I’ll just note that earnings are out tomorrow morning.
–Interesing post relating to Aug 2007:
No frills opening: “The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly regardless of their quality or credit rating.”
Note to self, any asset which has zero liquidity likely has a similar amount of ‘quality’.
Notes
August 11, 2025
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–Friday featured higher yields with 2s up 2.6 bps to 3.758 and 10s up 3.9 bps to 4.283%. Two year is 57.2 beneath EFFR (4.33) and tens at 4.7 under. Bowman this weekend said she thinks Fed should cut 3 times this year. EFFR is 4.33 to that would mean 3.58 or 9642.0 by Dec. Currently FFF6 is 9627.0 or just 15 bps away. SFRZ5 settled Friday at 9625.5. On the SOFR strip, reds, were down 4 to 9686 or 3.14%, while greens, blues and golds (3rd, 4th, 5th years) were -4.5.
–NVDA and AMD agree to pay 15% of China chip sales revenues to the US gov’t. CPI is tomorrow, along with grain report.
–Buyer Friday of 30k TYU5/Z5 115c calendar for 24. Just rolling into long Dec calls which settled 25 ref TYZ5 111-27, with 20d. Continued buyer of SFRU5 9612.5/9625cs for 1.5 (over 50k Thursday/Friday. Requires perception of a 50 bp cut in Sept). There continues to be buyers of downside in case the Fed holds pat against extraordinary political pressure. Example, buyer of 10k SFRX5 9575/9568.75ps for 0.5. While front end option plays are concerned with Fed policy going into year-end, the peak contract on the SOFR curve is SFRH7 at 9689, and SFRZ6 is close at 9687.5. Both consistent with a ‘terminal’ rate of around 3%. Peak open interest level in 0QZ calls is 9700 strike with 264k open, settle 18.5. SFRH7/H8 settled 18 bps (9689/9671). Faster than anticipated easing would likely see back spreads rally significantly.
Defunct Economists
August 10, 2025
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“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” John Maynard Keynes: The General Theory
I was looking through old Greenspan speeches for a particular passage, where he had said – before the fact – the late 1990’s dot-com investment frenzy will lead to a few winners and many losers and bankruptcies, but there’s no way for the Fed 1) to know which companies or 2) to interfere in the process. The Fed’s job is only to mitigate the fallout. I didn’t find that particular passage but I did clip a lot of other Greenspan quotes which were amazingly prescient. This one is from Jackson Hole 1999. Quite salient in that it was just before the unraveling associated with the dotcom burst:
…to date, economists have been unable to anticipate sharp reversals in confidence. Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect. To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes.
BBG: …a $29 billion financing package for Meta Platforms Inc.’s massive data center in Louisiana… ‘Private credit has been itching to get into this space,’ said John Medina, SVP on the global project and infrastructure finance team at Moody’s Ratings. ‘This deal is one of the first of its kind for private credit and if it is successful, we would expect to see more.’ The biggest technology companies are in an AI arms race now, and they need cash to win.”
With respect to the previous two paragraphs, I heard a thought-provoking interview with Dan Rasmussen of Verdad Capital. First, he roughly quantified the size of private equity: S&P 500 has a market cap of around $50T. The 2000 companies in Russell have a total market cap of around $2T and Private Equity backed companies number about 12000, with a total cap of just over $2T. Because these smaller companies are voracious borrowers, the equity sits behind the Private Credit total of around $2T on the capital structure. He noted that some university endowments (over) allocated >30% of portfolios to private equity. [Perhaps that was reasonable when rates were low. But now they’re stuck. So… Executive Order bailout: allow PE investments in 401ks]. The other thing Rasmussen mentioned regarding AI and big tech, is that AI is “…the first tech innovation that’s capital intensive (since fiber optics). AI companies have gone from one third of the capital intensity of US industrial companies to 3x the cap intensity. The marginal cost of an old google search was near zero, but the computing power needed for AI responses is huge. I did not try to fact-check these comments, but certainly, spending on data centers is massive. There are going to be some spectacular winners and losers.
Now consider these tidbits:
New York state’s cumulative three-year budget gap has swelled to $34 billion, according to Comptroller Thomas DiNapoli.
Chicago faces a $1.1 billion budget gap for 2026. Mayor Johnson:
“We have reached a point of no return. The systems that people rely upon — education, health care, housing, our transportation — they are woefully underfunded, and everyone knows that. Everyone knows what, you know, my commitment is to progressive revenue. I can’t do this by myself.” [after having continued and expanded Lightfoot’s policies to drive the biggest taxpayers out of Chicago]
“If D.C. doesn’t get its act together, and quickly, we will have no choice but to take Federal control of the City, and run this City how it should be run, and put criminals on notice that they’re not going to get away with it anymore.” -President Trump
In my opinion, President Trump thrives on impulse and chaos. On display in markets with the Liberation Day stock swoon, the copper market tariff meltdown, Friday’s Swiss tariff announcement that shook the gold market. We’ll see what happens with the Trump/Putin summit (CLU5 down 5% last week), but on a more mundane level are the domestic issues of badgering Powell, firing the head of the BLS and now axing the head of the IRS.
The funny thing though, is that the jobs report and firing of the BLS head brought a lot of critical issues to light. For example, response rates to employment questionnaires have been dwindling and are sent through the mail. I hadn’t realized that. But now we seem to have a lot of experts on US Gov’t data collection and shortcomings. Confidence in gov’t data in general is waning.
With billions pouring into AI, the gov’t can’t seem to COUNT, and legacy municipalities are drowning. It’s an absurd irony. In my opinion, Truflation (around 1.7%) is likely more accurate than CPI, expected Tuesday at 2.7%. The most up-to-date, technologically-advanced data are market prices, and certainly the Fed tracks pricing signals. Obviously, even those can be horribly wrong, as witnessed in the Nasdaq meltdown at the turn of the century.
Below are just a couple of other interesting Greenspan snippets during the Nasdaq ‘bubble’. Short market commentary pertaining to last week below that.
Greenspan 1997: Globalization of Finance
https://www.federalreserve.gov/boarddocs/speeches/1997/19971014.htm
The increasing substitution of concepts for physical effort in the creation of economic value also has affected how we produce that economic output…
Because the accretion of knowledge is, with rare exceptions [that I have personally witnessed], irreversible, this trend almost surely will continue into the twenty-first century and beyond. Value creation at the turn of the twenty-first century will surely involve the transmission of information and ideas, generally over complex telecommunication networks. This will create considerably greater flexibility of where services are produced and where employees do their work.
Governments are beginning to recognize that the release of timely and accurate economic and financial data is a critical element to the maintenance of financial stability. We do not know what the appropriate amount of disclosure is, but it is pretty clear from the Mexican experience in 1994 and the recent Thai experience that the level of disclosure was too little.
Rather, we should recognize that, if it is technology that has imparted the current stress to markets, technology can be employed to contain it. [not so sure about this one]
1997: Tech Change and the Economy
But do keep in mind that the government has an obligation to limit systemic risk exposure, and centuries of experience teach us the critical role that financial stability plays in the stability of the real economy. Bankers also have an obligation to their shareholders and creditors to measure and manage risk appropriately.
1998: Question: Is there a new economy?
https://www.federalreserve.gov/boarddocs/speeches/1998/19980904.htm
Moreover, it is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress. Developments overseas have contributed to holding down prices and aggregate demand in the US in the face of strong domestic spending.
We take for granted that contracts will be fulfilled in the normal course of business, relying on the rule of law, especially the law of contracts. But if trust evaporated and every contract had to be adjudicated, the division of labor would collapse. A key characteristic, perhaps the fundamental cause of a vicious cycle, is the loss of trust.
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When does the idea of biting off more than you can chew contribute to fraying in the institutional architecture? Recent administration ideas: Take over DC. Revamp gov’t agencies with new personnel and systems. Bring manufacturing back to the US. Manage the Fed and monetary policy. Take over Gaza efforts. Send military units to deal with Mexican cartels now labeled as terrorist groups. Parcel Ukraine. Re-work global trade. Privatize Fannie & Freddie. I personally happen to agree with many, though not all, of the ideas. My concern is that haphazard implementation could shake the most important factor which underpins the economy/asset mkts: confidence.
OTHER THOUGHTS/ TRADES
Buyer over 50k SFRU5 9612.5/9625cs for 1.5 last week. This trade needs strong perception of 50 bp cut at the Sept 17 meeting, which occurs just after SFRU5 option expiry of 12-Sept. Jackson Hole Conference is Aug 21-23.
SFRU5 9600c has 505k of OI, settled 4.5, 34d vs 9592.5. Most of ANY SOFR call. SFRZ5 9650c has 448k open, settled 7.5 vs 9624.0. In midcurves, 0QZ5 9700c has the most OI at 264k, settled 18.5 with 42 delta. Had been a lot of 9700/9800 c spd buying in 0QZ.
On the SOFR strip the lowest quarterly contract is SFRU5 at 9592.5. SFRM5 settled Friday 9563.5, so the spread is -29. It’s reasonable to say the market fully expects an ease of 25 at the Sept meeting. FFV5 settled 9590.5 vs EFFR of 4.33% or 9567 (spd of -23.5). Whenever a forward contract prices certainty of a Fed move, it almost always extends the idea. In my opinion SFRU5 could easily trade above 9600 this week. (Inflation data Tuesday and Thurs, CPI/PPI, with Retail Sales Friday).
NOTE: Bowman on Saturday says she favors three rate cuts this year, beginning in Sept.
On the week, SFRH7 fell the most, -8.5 bps to 9689, representing a retracement of about half of the NFP rally. SFRU5 was just -1 on the week at 9592.5.
Roll buying TYU/TYZ 115c calendar for 24 in 30k. TYV 115c settled 25 and has 20d ref 111-27. The futures roll will become more active as TYU5 options expire 22-August. Call rolls like the above tend to push the TYU/Z roll lower as do easing expectations.
MOVE index which measures treasury vol closed at 79.2, its lowest level since early 2022, before the rate hike cycle began. VIX at 15.15 is also near recent lows, but MOVE is surprisingly complacent, almost as if Yield Curve Control is about to be instituted.
| 8/1/2025 | 8/8/2025 | chg | ||
| UST 2Y | 369.8 | 375.8 | 6.0 | |
| UST 5Y | 376.9 | 383.0 | 6.1 | |
| UST 10Y | 423.0 | 428.3 | 5.3 | |
| UST 30Y | 480.2 | 485.3 | 5.1 | |
| GERM 2Y | 192.5 | 195.2 | 2.7 | |
| GERM 10Y | 267.7 | 268.8 | 1.1 | |
| JPN 20Y | 255.4 | 250.8 | -4.6 | |
| CHINA 10Y | 170.2 | 169.6 | -0.6 | |
| SOFR U5/U6 | -95.0 | -88.5 | 6.5 | |
| SOFR U6/U7 | -0.5 | -1.0 | -0.5 | |
| SOFR U7/U8 | 22.5 | 21.5 | -1.0 | |
| EUR | 115.89 | 116.43 | 0.54 | |
| CRUDE (CLU5) | 67.33 | 63.88 | -3.45 | |
| SPX | 6238.01 | 6389.45 | 151.44 | 2.4% |
| VIX | 20.38 | 15.15 | -5.23 | |
| MOVE | 83.83 | 79.20 | -4.63 | |
Loosening up the 401k strings
August 8, 2025
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–A lot going on. Yields a bit higher with flattening bias. 2y up 3.3 bps to 3.732%, tens up 1.1bp to 4.244%. On the SOFR strip, reds (2nd year) -4.625 to 9690 or 3.1% and golds (5th year) -1.75 to 9636 or 3.64%. Targeted SOFR call structures being placed to pin the FF target going into the end of the year. As an example, buyer of 30k SFRU5 9612.5/9625cs for 1.5. That one is a bit aggressive, requiring strong perceptions of a 50 bp cut at the Sept 17 FOMC; the options expire 12-Sept. More on FF targets below. (Maybe that SFRU c spd can find a cozy place in the 401k…)
–Speaking of which, (BBG) “Trump signed an executive order easing access to private equity, real estate, cryptoccy and other alternative assets in 401(k)s, a major victory for industries looking to tap some of the roughly $12.5 trillion held in those retirement accounts.”
Completely unrelated of course: BBG: “A Blackstone fund further cut the value of a PRIVATE CREDIT loan for Thoma Bravo- backed software company Medallia Inc, revealing growing stress for its single largest investment. …Blackstone’s publicly traded development company, Secured Lending Fund, marked the loan at around 87 cents on the dollar as of June 30…”
–Maybe the first snippet should be amended to “…a major victory for investment companies looking to off-load underperforming private equity and credit crap to retail.”
–Since I’m already veering a bit off course, I think building a bridge from Italy to Sicily is (also) stupid.
–In economic news Continuing Claims are continuing to edge higher, last at 1.974 million, new high since start of tightening cycle. Not really at a worrisome level yet, but similar upturns occur before previous recessions. Additionally, yesterday’s June Consumer Credit report was weak with Revolving Credit declining in both May and June. Bad. Q2 revolving credit growth was just 0.7%. Not keeping up with the Joneses inflation. Real retail sales up less than 1% this year.
Here’s a little table with FF effective rates given 25 bp cuts:
Current EFFR & 25 bp cuts:
4.33 = 9567 = NOW
4.08 = 9592
3.83 = 9617
3.58 = 9642
3.33 = 9667
3.08 = 9692
SOFR option trades on underlying SFRZ5 (December) target between 3 and 4 cuts, i.e. between 9642 and 9667. For example:
SFRZ5 9631/9637/9656/9662c condor 1.75 paid 5k
SFRZ5 9643.75/9656.25/9668.75c fly 1 paid 3k
There are other larger trades of this sort; I would simply note that SFRZ5 futures open interest is 1.385m, while SFRZ5 CALLS are over 4.7 million with peak strike 9650c at 445k (SFRZ5 9625.5s)
If the Fed cuts 50 in Sept, a LOT of those trades will need to be adjusted higher….
From Jackson Hole 2000 (Greenspan)
Earlier in the postwar period, even we in the West believed that market failure was a common occurrence. To some, this belief justified significant state controls and frequent intervention on the microeconomic level to improve, as they saw it, the functioning of markets and to maintain economic stability and growth. At the macroeconomic level, an exploitable tradeoff between unemployment and inflation was widely believed to exist, and a little inflation was perceived as useful to prime the pump of prosperity.
Remnants of those views, of course, remain. But it is remarkable how far economic opinions and “conventional wisdom” have shifted since the 1970s. At the risk of some oversimplification, there has been a noticeable reversion in thinking toward nineteenth-century liberalism, with the consequence that deregulation and privatization have become policies central to much governmental reform.
Fat Finger Economy
August 7, 2025
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–Just a quick indication of depth in the most liquid markets in the world. At 11:40am, USU5 printed 115-00. Just 33 seconds later, the day’s low at 114-11 occurred. At 11:41, 115-00 printed again. They’re blaming it on a ‘fat finger’. Maybe that’s what the whole payroll report was: just a fat finger. Certainly, equity index investors are shaking it off. In a way, if I were in the administration and tasked with the job of making data and markets look good going forward, I’d make a note of thin midday conditions just hit the BUY button. (We can stick the losers into the ‘sovereign wealth fund’).
–On Friday, someone paid 1.0 for 50k 0QZ 9787.5/9800cs and 0.5 for 50k or more 9837.5/9850cs Yesterday, he bought 50k 0QZ 9800/9837.5/9850c fly 1x1x1 for 3 (and sold the 9837.5/9850cs at 0.25).
SO…he’s left with LONG 9787.5c by my calculations….net price a bit over 4. Settled 4.25 vs 9696.5. Long an outright call makes more sense if looking for (or hadging against) something bad
–Russia deadline supposedly August 8…but late reports yesterday indicate a Trump/Putin meeting is in the works.
–Bank of England expected to cut. Yesterday SFIM5 settled 9587.25 and SFIU5 at 9611.5, so there’s your 25 bps.
–Thirty year auction today. CPI is August 12. Going into Jackson Hole on August 21-23. It’s ironically titled, “LABOR MARKETS IN TRANSITION”. Because WHEN YOU CAN’T GET THE DATA RIGHT it’s hard to make POLICY. It’s a bit late for this note, but yesterday I was pulled down the rabbit hole of reading old Greenspan Jackson Hole speeches. Super interesting. From 1999: (more in subsequent notes)
Doubtless, valuations are shaped in part, perhaps in large part, by the economic process itself. But history suggests that they also reflect waves of optimism and pessimism that can be touched off by seemingly small exogenous events.
