Little Caesars
July 25, 2025
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–Quiet session. Curve flatter. Two-yr note yield up 4 bps to 3.923%. 30-yr unch’d at 4.947%. Red to green (2nd to 3rd year) SOFR pack spread made a new recent low just over 12 bps. Red pack avg 9673.5, green pack 9661.375. Contracts from SFRM6 to SFRM8 are between 9652 and 9677… 3.25% to 3.5%. Ten year at 4.406%, about 100 higher. Vol edged lower.
–One thing that did catch my attention was a Sam Altman interview on account authorizations (voice and video). He is warning of a “significant impending fraud crisis” due to AI. Gee, I thought we were already in the midst of that…
“That is a crazy thing to still be doing. AI has fully defeated most of the ways that people authenticate currently — other than passwords,” he [Altman] added.
So maybe I’m safe just sticking with ABC123.
–I’m not much for the new emphasis on ‘feedback’ for every mundane thing that comes our way. I ordered carry-out lunch yesterday and instantly received a text asking to rate the service. “Likes” and surveys on overload, obligatory tips. But some experiences rate a 5-star review. I’d like to believe this one is true:
“Will absolutely return.” What a fantastic closer. Sometimes it’s not the food…it’s the service.
From Micro to Macro
July 24, 2025
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–Yields rose yesterday as trade deals fall into place, removing some uncertainty. New high SPX. Tens up 5.4 bps to 4.388%. Reds were weakest on SOFR strip. The peak contract, SFRH7, fell 7.5 bps to 9682.5 or 3.175%. There’s a lot of micromanagement on display in SFRU5 options, using spreads just 6.25 bps wide. For the last nine sessions SFRU5 has settled between 9585 and 9581. This week so far, 83 to 83.5. Last week there was a large buyer (50k) of 9593.75/9600cs for just under 1.5. Yesterday a buyer of 20k call condor, 9600/9606.25/9618.75/9625 for 0.25 (max value between 9606.25 and 9618.75). Also a buyer yesterday of U5 call condor 9575/9581.25/9593.75/9600 for 2.125 to 2.50. So in this latter case, the lower call spread is in the money now. Rolling down from the 9593.75/9600cs? Doesn’t really appear that way from OI.
So, SFRU5 futures open interest was up 34k. SFRU5 9581.25^ settled 15.25. Call settles:
9575.00 12.0
9581.25 8.75
9587.50 6.00
9593.75 3.75
9600.00 2.75
9606.25 2.25
If I could pay 0.5 for the 9600/9606.25, I think it’s worth it. It wouldn’t surprise me if the market starts to price in 50 bps for a Sept ease, just like last year. If the market settles on the idea of NO cuts, then it’s likely that all these call strikes will expire worthless.
–From the micro to the macro. The Trump.2 era of ten-year yields has pretty much been bound by the levels from election day ~4.29% to Inauguration Day ~4.58%. Chart attached.
At one point early on, Bessent said the admin wasn’t worried about Fed Funds, but rather about the 10y yield. Since then it’s been nothing but wailing about Powell keeping funds too high, even though tens have been fairly well behaved. Yesterday, Existing Home Sales came out at a weak 3.93 million rate. (New Home Sales today). Trump acts as if a lower FF rate will act as a huge stimulus and save the gov’t loads of interest money & boost housing. But even a 1% drop in funds won’t save a tremendous amount, likely less than $100b per year. Yesterday I posted this chart on X, showing that in 2017-2019 the spread between the 10y treasury and 30y mortgage was about 150 bps. Now that spread is stubbornly above 240 bps. If Fannie and Freddie are privatized, it’s likely the market will demand EXTRA compensation for credit risk. What Trump and Pulte really want is a tighter spread and lower mortgage rates. Waller, who appears to be lobbying for the Fed Chair job, doesn’t want the Fed to even own MBS. Rapid cuts in FF could lead to higher, not lower, long end treasury yields. Does Bessent overtly come in as a buyer of MBS? Or institute Yield Curve Control? A ten year yield of sub-4% and a mortgage spread of 150 would mean 30 yr mortgage rate of < 5.5%. Probably enough to create activity….
https://x.com/AlexManzara/status/1947998605677068437
“Flight to crap”
July 23, 2025
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–Yields continued to drift lower yesterday with 10s ending exactly the same as EFFR at 4.33%, down 3.6 bps yesterday. This morning, with the Japan tariff deal announcement and Japanese bond yields running to new highs, treasury futures have pulled back. As of this note, TYU5 is 111-04, -9, and lower than Monday’s settle of 111-06. Japanese stocks have exploded with Nikkei up 4%.
–New lows in all near 1-yr calendar spreads in SOFR. Eases are being priced into the future. SFRU5/U6 new low -97.5 (9583.5, +0.5 and 9681.0, +3.0). SFRZ5/Z6 -77 (9611.5, +1.0 and 9688.5, +3.0). Let’s consider a wild hypothetical and say the Fed cuts 50 next week. (You asked for it DJT…) SFRZ5/Z6 would likely rally 40. There was a trade yesterday, around 10k: SOLD SFRV5 9637.5c (6.75s) and BOT 0QV5 9700c (15.0s). Paid 8, settled 8.25, appears to be exit. Obviously the perceived risk is that the calendar keeps rolling down to a more inverted level (Z5 barely moves, while Z6 runs to or thru strike). So the prudent thing to do is exit, but an immediate big cut would have saved this position!
–Meme mania day with IB’s Steve Sosnick saying there’s a “flight to crap”. Kohl’s KSS was yesterday’s posterchild but there was a lot of it. I’m not even sure if the data’s right, but according to my chart, KSS had a range of $9, 12.37 to 21.39. In one day it’s a larger range than this entire calendar year thru Monday. Day in the sun for the stocks with the most short interest. The last time this happened was when the gov’t was handing out direct payments to households. Maybe now it’s because crypto is providing liquidity to the bros. Destined to end in FULL TEARS.
–Silver made a new high since 2011 with SIU5 39.555s, +22.1. Copper new high settle in futures.
–Today, Existing Home sales expected 4.0 million rate.
–Earnings reports from GOOGL and TSLA post-close, and pre-open CME slated to report.
–TARIFFS, TRADE DEALS, MEME STOCK MANIA…It’s BUSINESS TIME
not a flight to crap…Flight of the Conchords!
SOFR calendars, el Risitas
July 22, 2025
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–Yields fell Monday, stocks made new highs early and gold soared, almost as if a new wave of liquidity is ready to wash over markets. Ten year yield fell almost 6 bps to 4.37%. Near 1-yr SOFR calendars made new lows. For example, SFRU5/U6 fell 4 to -95 (9583, -0.5, 9678, +3.5). SFRZ5/Z6 also down 4 to -75 (9610.5, +0.5, 9685.5, +4.5).
–Anyone who has watched euro$ and then SOFR calendar spreads over time knows that, on occasion, these spreads indicate near certainty of when Fed action is likely to occur (not always right). I was chatting with a friend yesterday on this topic and the official end of Powell’s term, and I sent this (modified a bit this morning with actual settles):
SFRU5 9583 or 4.17. 16 lower than EFFR…so they’re tentatively pricing odds of easing
SFRZ5 9610.5 or 3.895. U5/Z5 spread -27.5. So there IS an ease priced there as the spread is around ¼ pct
SFRH6 9637 or 3.63 Z5/H6 spread is-26.5. Again, an ease
SFRM6 9662 or 3.38 H6/M6 spread is -25.0….NOW, we might think that spread should be -35 or even more inverted if NEW FED starts easing right then!
SFRU6 9678 or 3.22 M6/U6 spread is -16.0. What? Not much more chance of ease????
SFRZ6 9685.5 or 3.145 U6/Z6 spread is only -7.5…. Z6 and H7 are PEAK on SOFR curve….represents a LOOSE idea of terminal rate 3.0/3.25
After that the SOFR contracts start to steepen. WHY? Perhaps end of easing, perhaps worries about prospective easing leading to increased inflation expectations.
I mentioned yesterday that SFRH6/H7 1-yr spread was mostly front-loaded. That is, the first six months, H6/U6 is -41 (9637/9678) while the next six month spd is -8.5 (9678/9686.5). That first six-mo spread brackets Powell’s end and someone else’s beginning. Trump’s looking for 300 bps, this spread indicates 41. And the peak SOFR contract is compatible with a FF target 3.0-3.25%, 125 bps lower than right now. Look, SFRU5/SFRU6 is -95, around 100 bps of possible cuts. But SFRU6 and SFRU7 are the SAME price 9678.0 The spread is ZERO. This isn’t exactly a professional interpretation, but the layman, might say: the market is expecting relatively modest eases over the next year and then NOTHING. Put another way, Bessent in a private meeting might be saying, “Mr President, the market is calling bullshit on your call for big rate cuts.”
Upcoming calendar might be of interest:
FOMC July 30
NFP August 1
JAX HOLE August 21-23 (Labor Mkts in Transition)
FOMC Sept 17
In 2020 we have to cut a bit of slack because covid made people crazy. I didn’t spend much time on this so I hope I have the timeline right:
Jackson Hole Conference was August 22-24. The Fed released the ill-fated FAIT (avg inflation targeting) on August 27. Right before inflation EXPLODED. If you’ve ever seen the Laughing Spaniard (El Risitas) dubbed interview, this could be a new one: Spaniard with serious face Powell says, “we’re going to let inflation modestly run above 2%” then, breaking into hysterical laughter, in 2021 CPI was 7%. Harder laughter, SEVEN PERCENT! and in 2022 it was EIGHT PERCENT. The new FED FIVE-YEAR framework review will be released THIS YEAR.
In 2020, JAX HOLE Aug 22-24
FED FRAMEWORK statement AUG 27, 2020 (Avg inflation targeting)
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm
Rolling calendar spreads
July 21, 2025
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–Friday featured a decline in yields (continuing this morning) with a steeper curve. New low in a couple of near 1-yr SOFR calendars, for example SFRZ5/Z6 became more inverted by 2.5 to a new low -71.0 (9610/9681). SFRH6/H7 eased 2 bps to a new low -46.0. The peak quarterly SOFR contract has slipped back one slot to SFRH7 at 9681.5, consistent with the idea of a ‘terminal rate’ of 3.0-3.25%. 2yr yield fell 4.2 bps to 3.873% while tens were down 3.6 bps yo 4.429%. 30y was only down by 1.6 to 4.999%. 5/30 treasury spread ended at a new high of 104.
–Not much reaction to Japan’s elections though yen has firmed as LDP’s loss in the upper house appears to have been priced in. US interest rates are lower this morning going into a week with a light economic calendar and Fed blackout. Leading Index today expected -0.3 from -0.1. Ten year yield this morning is 4.38%, down nearly 5 bps from Friday. Current Fed Effective rate has acted as a magnet for the 10y, EFFR is 4.33%. SFRZ5/SFRZ6 is printing a new low at -73.0 this morning. This spread has steadily trended lower since January. Just prior to Inauguration Day on 14-Jan it settled +11.0, so a move of 84 bps since then, with the largest countermove being 13.5 bps. SFRU5/U6 is printing -93.5 this morning (9584.5/9678.0). FFQ5 is 9568 (pegging the current EFFR of 4.33) while FFQ6 is 9671.0, just over 100 bps lower in yield. The near 1-yr spreads have pretty consistently gravitated around 1% inversion: rate eases continue to be expected, but they’re pushed forward in time. A Powell ‘pink slip’ could change that, but for now, trends are solidly in place.
–So, given that the end of Powell’s term is in May, essentially at the end of the SFRH6 contract, and given that a new Fed Chair is ‘expected’ to slash rates, doesn’t it make sense for SFRH6/H7 to rapidly roll closer to Z5/Z6? Somewhat interesting that SFRH6/U6, the six month calendar in the beginning of H6/H7 is -40, while U6/H7 is just -7.5. (9638/9678/9685.5). Front loaded easing of the new Chair is being priced, but somewhat tentativeley.
Artifice
July 20, 2025
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In the languid days of summer, trading activity in the old CME Eurodollar pit stalled to a near halt. This is how a day might go: Get to the floor at 6:30. Data at 7:30, a modest flurry of business but little price movement. Leave the floor around 8:45 for a coffee. Sit outside at the Starbucks patio and admire the secretarial pool in willowy sundresses pouring out of the commuter train station. Their day was just starting at 9 or 9:30; but the trading day was essentially over. Back inside, a couple of locals ask if I can watch their butterfly orders, because they’re going golfing.
The rectangular pit was half a city block and held hundreds of order-fillers, locals and clerks. Options pit on the north end and back months stretching to the opposite south wall. On either side, brokers’ phone desks tiered up, holding hundreds more. On occasion, someone would blow up a huge, brightly colored beachball, and punch it high into the air, setting off a spirited volleyball game involving everyone. Floats up towards the desks and someone spikes it back towards center. A particularly high fly would generate ‘oohs’ and cheers. And of course, it also involved exchange personnel tasked with stopping this childish game, who would comically chase the bouncing ball, only enhancing the festive atmosphere. One of my favorite memories. Simple mind, simple pleasures.
In any event, the ‘trading floor’ has now moved to an electronic data center. Not nearly as fun. Is an electronic matching facility the same as a trading floor and do the rights of the B-share membership floor traders transfer (along with revenue considerations) to THAT trading facility? That’s the core issue of the current trial involving B-Share owners as plaintiffs against the CME. Seat prices have recently exploded pending the outcome of this trial, which should occur by the end of July. A friend has meticulously covered every day of the trial and it’s quite fascinating; several billion at stake.
The rush into data centers and AI ‘super-intelligence’ is perhaps at the opposite end of the spectrum from the physical trading floor. Meta is a leader, now constructing an AI center called Hyperion in Louisiana that’s been compared to the size of Manhattan, using 5-gigwatts. CNBC notes this is more power than some countries use. From The Deep View:
The scale reflects AI’s massive energy appetite. A single ChatGPT query requires nearly 10 times more electricity than a Google search. Goldman projects data centers will consume 8-9% of US electricity by 2030 up from 3-4% today. …Data centers will drive 20% of electricity demand growth.
Large data centers typically consume 200 million gallons of water annually, equivalent to 2000 homes. …Residents near Meta’s Georgia data center report wells running dry and water pressure dropping, with some homes left with non-functional sinks and toilets.
Is this a quest for knowledge or a replacement for intelligence? I can’t help but think of the classic 1964 Twilight Zone episode called ‘Time Enough at Last’. Henry Bemis is a bookworm bank teller with thick round glasses. He takes his lunch break in the bank’s vault, where he can escape to his books, undisturbed. “Moments after he sees a newspaper headline which reads ‘H-Bomb Capable of Total Destruction’, an enormous explosion outside shakes the vault, knocking Bemis unconscious. After regaining consciousness and recovering his glasses, Bemis emerges from the vault to find the bank demolished and everyone in it dead. Leaving the bank, he sees that the entire city has been destroyed, and realizes that, while a nuclear war has devastated Earth, him being in the vault has saved him.” He walks through the rubble of the city in despair, but at the very edge of hopelessness spies the Public Library, scattered books everywhere. Now he rejoices in the prospect of contemplating the world’s classics with all the time in world. He enthusiastically sorts the books for years of reading, but then stumbles, his glasses fall off and shatter. Utter despair.
At one time the Public Library was the repository of human knowledge. One develops intelligence by consuming knowledge. Carnegie funded a system of public libraries. “During the depression, DC’s Carnegie Library was called ‘the intellectual breadline.’” It was ‘dedicated to the diffusion of knowledge.’
In 1914 Henry Ford instituted “$5 Day” which doubled the wage of his workers, enabling them to buy the product that they were cranking out. (At the time employee turnover was a problem, however this program also helped build an industrial middle class). Today Zuckerberg is paying millions to poach top AI talent, which will likely end up replacing many workers in other industries. Accentuating wage disparity? Yesterday’s economic model had aspects which broadened wealth and knowledge. Not so sure about today’s.
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Back to markets: copper has made new all-time highs, partially due to tariffs. Huge electricity demands require industrial metals. For fun I created an overlay of the 10y breakeven and BBG’s industrial metals index. Could data center construction help drive inflation expectations higher? That idea is probably a stretch, but there does seem to be a loose relationship.
The next chart is clearer. The reign of the ‘King of Debt’ (Trump) appears strongly correlated with a steepening of the 5/30 treasury spread.
The last Fed cut to the current target of 4.25 to 4.50% was December 18. At that time 5/30 was just above 25 bps. On Inauguration Day, 5/30 was around 41; it dipped to 35 in mid-Feb and has been trending higher ever since. I did a ChatGPT search which revealed that every time Trump calls Powell ‘stupid’ the 5/30 spread gains 1.12 bps. Just kidding. But it’s starting to look that way.
A couple of more thoughts…
BBG’s Macro Man, Cameron Crise, notes ”…the explosion higher in uber-speculative assets certainly does not provide much support to the notion that monetary policy or conditions are remotely restrictive…” He cites the ‘BUZZ Index’ which is ‘Next Gen AI US Sentiment Leaders’ [huh?]
Crise: I should note that when the BUZZ index has a three-month Sharpe that is a) above 4, and b) more than 1 point above the SPX, as is the case today, it has only been higher in absolute terms four weeks later around 41% of the time, with an average return of -2.3% (median -1.6%). That doesn’t guarantee that the top is in, but it’s not exactly a compelling proposition that you should pile in here. It also rather suggests that the public’s animal spirits are sufficiently feral that the notion that monetary policy is really restrictive rings rather hollow.
Related concerns: GS Non-Profitable Tech Index (GSXUNPTC) has soared 69% off the April low (though it’s still only half the price of the 2021 high). BBG’s Credit Weekly: Junk Bond Investors Pile into the Riskiest Debt. “Bonds rated in the CCC range have gained 0.75% this month …outpacing all other ratings tiers… The highest rated junk bonds, in the BB tier, have turned in the worst performance…implying that investors are trading out of the less risky junk bonds and into the securities paying the most yield.”
Waller didn’t touch upon these signs of speculative excess when arguing for a 25 bp cut at next week’s FOMC. He just deems the current FF target as restrictive and is concerned about the labor market. Small silver lining in the upcoming week: It’s the Fed blackout period.
OTHER THOUGHTS/ TRADES
A couple of large highlight trades: +50k SFRU5 9593.75/9600cs for 1.375. SFRU5 settled 9583.5, down 1.5 on the week even as Trump again threatened to fire Powell (and replace him with an easy money proponent) and Waller called for a cut. This call spread settled 1.0. FFQ5 settled 9568.5. A cut in July would be 9592, while unch’d policy is 9567.
2QH6 9800/9825cs was bought 140k for 1.0 or slightly below synthetically. Underlying future is SFRH8 which settled up 3.5 on the week at 9659.0. Disaster trade. 2% strike; expires 13-March 2026.
USU5 108.0p bought 41k, synthetically 28.5 and 34.5. Settled 24 vs USU5 112-14, which was down from 112-29 the previous Friday. The only reason I mention this trade is because that strike is now the largest open interest in Sept bond puts with 51k. 0.15 delta. As yields go higher the duration of the USU contract will increase due to change in cheapest-to-deliver.
| 7/11/2025 | 7/18/2025 | chg | ||
| UST 2Y | 391.2 | 387.3 | -3.9 | |
| UST 5Y | 399.0 | 396.1 | -2.9 | |
| UST 10Y | 442.1 | 442.9 | 0.8 | |
| UST 30Y | 495.6 | 499.9 | 4.3 | |
| GERM 2Y | 189.6 | 186.4 | -3.2 | |
| GERM 10Y | 272.3 | 269.4 | -2.9 | |
| JPN 20Y | 250.7 | 252.4 | 1.7 | |
| CHINA 10Y | 166.4 | 166.6 | 0.2 | |
| SOFR U5/U6 | -86.0 | -91.0 | -5.0 | |
| SOFR U6/U7 | 4.0 | 2.5 | -1.5 | |
| SOFR U7/U8 | 21.0 | 24.5 | 3.5 | |
| EUR | 116.90 | 116.27 | -0.63 | |
| CRUDE (CLU5) | 67.04 | 66.05 | -0.99 | |
| SPX | 6259.75 | 6296.79 | 37.04 | 0.6% |
| VIX | 16.40 | 16.41 | 0.01 | |
| MOVE | 85.48 | 83.29 | -2.19 | |
https://en.wikipedia.org/wiki/Time_Enough_at_Last
Waller makes his case. Market ignores. Like talking to a wall
July 18, 2025
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-Waller specifically calls for a rate cut at the July meeting. The market is fine with pegging him as a dissenter where the majority, led by Powell, will vote for no change. FFQ5 prints unch’d at 9568 this morning; little odds for a cut. SFRU5 is 9582.5, up 1.5. That’s just 15.5 bps above the current EFFR of 4.33% or 9567.0. Next FOMC meetings July 30 and Sept 17.
From Waller’s speech:
So let me follow my own advice and state up front the reasons I believe we should cut the policy rate at our meeting in two weeks.
First, tariffs are one-off increases in the price level and do not cause inflation beyond a temporary surge. Standard central banking practice is to “look through” such price-level effects as long as inflation expectations are anchored, which they are.
Second, a host of data argues that monetary policy should be close to neutral, not restrictive. Real gross domestic product (GDP) growth was likely around 1 percent in the first half of this year and is expected to remain soft for the rest of 2025, much lower than the median of FOMC participants’ estimates of longer-run GDP growth. Meanwhile, the unemployment rate is 4.1 percent, near the Committee’s longer-run estimate, and headline inflation is close to our target at just slightly above 2 percent if we put aside tariff effects that I believe will be temporary. Taken together, the data imply the policy rate should be around neutral, which the median of FOMC participants estimates is 3 percent, and not where we are—1.25 to 1.50 percentage points above 3 percent.
My final reason to favor a cut now is that while the labor market looks fine on the surface, once we account for expected data revisions, private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have increased.
–There are a lot of obvious signs that financial conditions are already easy. Stocks at new highs (and levitating upwards on little volume), USD is soft. Corporate spreads are tight. The only factor that could be spilling into the restrictive bucket is long rates, with the 30y hovering around 5%. In terms of labor, some would consider a rate at 4.1 to 4.2 as full employment.
–Yesterday’s session was quiet with a flatter bias. 2y yield up 3.4 bps to 3.915%. Tens up 1.4 to 4.465%. Once again, the ten-year breakeven (treasury – tip) edged to a new high 246.5. The high of this calendar year was in Q1 at 247.5. 2024 high was 243.0, 2023 high was 251.6. In 2022, the October high was 257.7, but in April it was 303.6. The Fed (& Waller) might correctly say from this data that inflation expectations are ‘anchored’ but not at 2%, rather at 2.5%. And if neutral is 1.25% that points to a funds rate of 3.75-4.00 vs today’s 4.25-4.5%. Forward SOFR contracts (reds) seem to be comfortable around 3.25%, testing 3% every now and then.
–Today’s news touches upon inflation expectations. U of Mich 1-yr expected 5.0% from 5.0% last month. 5-10 year expectations 3.9% from 4.0%. NOT anchored. Housing Starts as well this morning.
–When the Fed started to cut, it was in September, just after the yen-carry turmoil of early Aug when yen surged ($/yen collapsed from 154 to 142 in a few days). Low in $/yen just below 140 coincided with the Fed’s 50 bp ease. Japanese election on Sunday. Yen has been trending weaker this month, with $/yen up to 148.70.
Spreads suggest ‘inflate out of it’ policies
July 17. 2025
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–Initial turbulence in yesterday’s session revolved around headlines that Trump had asked Republican lawmakers if he should fire Powell, and that ‘Trump is likely to fire Powell’ (WH official). Stocks and bonds immediately tanked; front end rate futures jumped, along with implied vol. Shortly thereafter, the chicken-out pivot came, with ‘Trump not thinking of firing Powell’. Ultimately, the core theme the market is coming away with is that the admin is pursuing policies that may juice growth, but at a price of higher inflation. As an aside, PPI yesterday was 0.0, but previous readings revised slightly higher.
–Concerns about higher inflation are reflected in spreads: Ten yr breakeven (treasury – tip) edged to another modest new high at 245 bps. 2/10 treasury spread ended (at futures settlement) at a new high 57 (though the recent high was in April at 64.2). 5/30 is at its best level since 2021 at 103 bps. Attached is a chart of 2/30, at 113. The trend line target is 150. High post-covid has been 229. The 2y note yield was down 7.3 bps on the day to 3.88%, while the 30y was nearly unch’d, just over 5.01%.
–On the SOFR strip, several near calendars made new lows. As the attached article from 2019 indicates, if Powell were to be removed, Vice Chair Jefferson would take the slot and a new appointment by Trump would have to be confirmed by the Senate. Takes some time. New low in SFRH5/M5 3m spread at -23.5 (9638/9661.5). New low in SFRZ5/Z6 1-yr calendar at -69.0 with Z5 up only 4 bps to 9612, but Z6 up 10 to 9681.0. SFRZ6 is still the peak SOFR contract.
–Trade highlights: another 90k bought 2QH6 9800/9825cs for 0.875 synth. This week’s total 150k, settled 0.75 vs SFRH8 9656.5. TYV 108p/TYX 107.5p stupid, 51 paid for 7.5k (2 day total 20k), settled 23 and 26. New buyer of 100k TYQ 115.5c for cab-7. Aug options expire a week from tomorrow and these calls are 5 points otm, but a week can contain a lot of risk given our current cast of characters.
–Today includes Retail Sales, expected 0.1 from -0.9 last. Job Claims expected 235k. Philly Fed Mfg -1 from -4.
Long bond near 5%, trying to hold…
July 16, 2025
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–Long end continues to trade suspiciously weak, with 30s just above 5% at 5.017% (+4.3 bps). Tens rose 6 bps to 4.487%. CPI slightly better than feared, with yoy 2.7% and Core 2.9%. PPI today. Large buyer +41k USU5 108p on blocks. Early, +22.5k for 28.5 covered 112-09, 16d and then later +18.5k for 34.5 covered 112-02, 19d. Settled 36 vs USU5 111-31s. New position, OI +40k. Also new: Late block buyer of TY puts: +10k each TYV5 108.0p for 26 with +10k TYX5 107.5p for 28 covered TYU5 110-10. (Settled 26 and 29 vs TYU5 110-09s)
–Early in the session Bessent said he favors Powell serving out his term until it ends in May. Jamie Dimon warned it’s essential that the central bank remains independent (followed of course, by Trump again blasting out his call for an immediate cut of 300 bps). FFQ5 is back to 9567.5/68.0 (settled 9567.5) so the market sees almost NO chance of an ease at the July 30 FOMC. Beige Book released this afternoon.
–Just for reference, the high yield on the 30y was 5.095% on 21-May. Settles on front treasury futures at that time: USM5 110-25 (yesterday settle 111-31) and WNM5 113-14 (yesterday settle 114-24).
–Note that the ten-yr breakeven (treasury – tip yield) edged to another new recent high of 2.426%. An additional nudge in the direction of higher forward inflation worries. One other thing, probably not even worth a mention but I will do so anyway since I’m focused on this for myself, HYG made a slight new low for July (for now it looks like a minor setback after the fierce rally off the April low). I had read that HYG and JNK holdings actually increased in quality, because the really crappy stuff was going to private credit. NO CONFIRMATION of that, but I thought this comment on X was interesting given Trump’s plan to use executive order to help open 401Ks to private markets. From EndGameMacro:
This is about rerouting a tidal wave of captive capital, trillions locked in 401(k)s into private markets that are increasingly illiquid, overvalued, and in desperate need of fresh inflows. Behind the populist framing lies a deeper truth: public markets are saturated.
Who are you going to believe? Blackrock or EndGame Macro?
–One last mention is in SOFR. Every contract from SFRZ5 through golds was -6 to -7.5 on the day. There was a lot of trade in SFRU5 puts, contract settled 9582.0. But the trade I am mentioning was flagged by BBG’s Edward Bolingbroke: a sale of 25k SFRM7/U7/Z7 butterfly at -0.5. New position. Settles: M7 9667. U7 9661.5 and Z7 9655.5. So M7/U7 settled +5.5 and U7/Z7 +6.0, fly settled -0.5. Back spreads typically aren’t that volatile, but in general have firmed a bit. Interesting to compare this fly to a year forward: SFRM6/U6 settled 9652.5/9665.5 so -13.0 while U6/Z6 settled 9665.5/9671 or -5.5. -13 – (-5.5) is -7.5, but I doubt the curve will act in a well-behaved roll. My initial thought was, “OF COURSE they’re selling, because Dec 31 2027 is on a Friday, so the turn covers a long weekend.” In the old eurodollar contracts, December always traded at a slight yield premium due to end-of-year funding pressures. In any case, blue horseshoe says avoid being long SFRZ7.
CPI today. Tariff impact?
July 25, 2025
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–Quiet session Monday. Large trades: BUY 50k 2QH6 9800/9825c for 1.0 ref SFRH8 9656.0. Settled 2.25 and 1.50 or 0.75 vs 9655.5. Expires 13-March 2026
SFRU5 9593.75/9600cs 1.375 paid for >50k on the day, settled 1.25 vs 9585.0. (5.0/3.75). Expires 12-Sept, while the Sept FOMC is on the 17th. Call spread would likely fill on an ease at the July 30 FOMC (with more expected). Otherwise, it depends on very strong easing prospects for Sept and high odds for the Oct 29 meeting. Note that FFQ5 which had been heavily bought a couple of days ago at 9568.5 and traded 69, was 68/68.5 yesterday. This contract directly prices odds for a July 30 Fed cut, and those odds are small(er).
5k add, 2QU5 9700/9750 vs 3QU 9675/9725cs for 0.50. Buy green, traded flat last week. Synthetic steepener. All of these trades are dependent on the idea of aggressive near-term cuts. They don’t have to happen immediately, but will probably require a catalyst in the form of much weaker econ data or an unwelcome geopolitical event.
–CPI today expected 0.3 both headline and Core on month/month basis. CPI expected 2.6% yoy vs 2.4% last. A lot of headlines this morning about rising long-end yields in Japan; new highs. Yesterday the US 30y came awfully close to 5% (probably around 112-11 in USU5; the low was 112-15). Headline which caught my eye in the Chicago Tribune:
State Farm defends hefty 27.2% hike in Illinois homeowner insurance rates.
Note that 10-year breakeven (treasury – inflation indexed TIP) edged to a slight new recent high 241.7 bps. Not exactly worrisome, but I’m sure the Fed would be a lot more comfortable with the low end of the recent range which is closer to 2.25%.
–Bank earnings this morning JPM, C, WFC and BLK
