New low treasury yields for 2025, new high vol
March 3, 2025
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–Trump announces Crypto Strategic Reserve, causing bitcoin to jump 10%. Precious metals also rebounding, but in a much more muted way. GCJ +34.50 to 2883, up 1.2%.
–Friday featured new low yields for this calendar year, with tens down 5.6 bps to 4.227%. 2y now just under 4% at 3.995 (-8.3 bps). PCE inflation data about as expected +0.3 with Core also +0.3 m/m. Core yoy at 2.6% matched the low of last year at 2.6%, the low of this cycle. Real Personal Spending was -0.5%, reflecting concerns about consumption going forward. Treasury vol at new high for the year. On Friday 2/21, TYM atm 109.5^ was 2’31. On Friday 2/28, the atm 111^ is 2’48.
–Today’s news includes ISM Mfg expected 50.8 vs 50.9 last. New Orders expected 54.6 from 55.1. New Orders bears close scrutiny as some reports indicate that orders are slowing significantly on policy uncertainty. Atlanta Fed GDP Now plunged to -1.5% for Q1. However, NY Fed Nowcast is still 2.9%.
–On SOFR strip, new lows in near calendars. SFRH5/H6 settled -68.25 (9571.25/9639.5) with H6 along with Z5 being the strongest contracts Friday, +10.5. (Z5 at 9631.5 or 3.685% vs Fed’s year-end projection of 3.9%). Near contracts being held down as easing is pushed back in time somewhat. For example, the guy who bought 100k FFK5 at 9571 the previous week continues to exit with a small profit, selling 60k at 9573.0 (settled 9574.5).
–Headline just on BBG: German 30-yr bond yield rises 10 bps on defense spending.
Bessent in the Driver’s Seat?
March 2, 2025 – Weekly Comment
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Yields at new lows for the year. On the week, 2s dropped 19 bps and are now just under 4%. 5s down almost 23 at 4.026%, 10s down 19 at 4.227%, now 10 bps under the Fed Effective rate of 4.33%. The thirty-year fell 15.3 bps to 4.513%.
A lot of people are asking what’s driving it. Standard broker fallback: “More buyers than sellers.” This one with a twist. There’s a huge buyer inhaling May TY calls. His name is Bessent. I am joking about Bessent, though he had clearly articulated that the administration wants long rates down. On Tuesday there was a new buyer of 100k TYK5 111.5c up to 0’40 (settled 0’62 on Friday vs 111-03. On Wednesday, a new buyer of over 100k TYK5 113.5c for 0’19 covered 110-20 with 17d. On Friday these strikes settled 0’62 and 0’25 with TYM5 111-03. Implied vol ended the week at a new high for this calendar year. MOVE at 104.46, having been sub-84 a week and a half ago on Feb 19. (Spike high in MOVE pre-election was 136). May treasury options expire 25-April, after quarter-end and after April tax day, but before May 7 FOMC. Quarter-end may be interesting to see if repo spikes (might provide clues to ampleness of reserves). It’s also the end of Japan’s fiscal year.
Support for treasuries can be pegged to several factors. Job cuts in government and budget cutting in general. Steady inflation data. Slowing economy. Vulnerable equities. Though monthly PCE prices were +0.3 for headline and core, yoy Core at 2.6 matched the low of the cycle from last June.
The chart above is 5y US yield. Since Sept 2022, the range is ~ 150 bps, 3.4 to 4.95. Last at 4.02. (around the mid-pt).
On 9/21/22 FF hiked to 3.125 (range 3.0-3.25). Peaked 5.375 July’23. Now 4.375. (~ the mid-pt)
YOY CPI peaked 9.1 June’22. Last 3.0. Low 2.4, expected 3.0 for February (released 3/12).
Post SVB failure, the 5y plunged to 3.3% in May 2023. FF were 4.875%, just about equal with yoy CPI at the time. That is, the 5y yield was inverted to FF & CPI by 150 bps! One could easily make the case that the Fed could cut 25 or 50 by Q4 (to 4.125 or 3.875), which would still likely be well above CPI of 2.5 to 3.2, and 5y yield could hit 3% in a panic situation. Where’s the panic? Perhaps from falling asset prices as the world rebalances away from the US.
I’m not going to get into the Trump/Vance/Zelensky meeting. Unsurprisingly, strong feelings on both sides. But to me, the outcome is unambiguously negative for the eurozone.
Chart above is EUR/JPY. I can’t help but feel that a large downside move is near. Then I wonder if perhaps Europe makes a U-turn. After all, it will be the children of Europe on the front lines. Perhaps huge investments in defense/tech are around the corner. Could Europe’s manufacturing base become rejuvenated?
I’m reminded of a speech made by Sec’y of the Navy Carlos Del Toro on 14-Dec 2023. (As far as I know, first highlighted by Luke Gromen – Forest for the Trees). Excerpt below:
This creates substantial operational and economic risks for the American economy in the event of a crisis or conflict.
Over the past three decades, while China’s comprehensive maritime power has skyrocketed, ours has dramatically declined.
History demonstrates a clear pattern: no great naval power has ever existed without also being a dominant commercial maritime power, encompassing both shipbuilding and global shipping.
It is imperative that we take decisive action to reclaim America’s position as a leading maritime power.
I had read that and thought, hmm, maybe it’s appropriate to have a little exposure to this theme. So I did a little (and I mean a little) bit of research and decided to buy the ADR on Kongsberg Gruppen (KBGGY), a defense company in Norway (missile controls for maritime and air traffic surveillance).
I’m not saying Del Toro’s speech caused this run. After all, gold priced in EUR looks quite similar with a decided acceleration in trend since the start of 2024.
What I do believe is that the Trump administration is causing hard shifts in incentives the world over. Perhaps positive in the longer run for the US, but in the short run, fiscal dominance is receding. For years, the US avoided recession, due in large measure to US deficit spending.
The latest Atlanta Fed GDP Now forecast for Q1 crashed to -1.5%. After recent data, “…the nowcast of the contribution of net exports to first-quarter real GDP growth fell from -0.41 percentage points to -3.70 percentage points while the nowcast of first-quarter real personal consumption expenditures growth fell from 2.3 percent to 1.3 percent.” To those that believe deteriorating economic data will sidetrack Trump’s agenda, my thought is that whenever he’s attacked, Trump’s M.O. is to double down.
Other Thoughts / Trades
On the SOFR strip, over the last week the strongest contracts were June’26 to June’28, +27 to +28 bps. The rally in deferred contracts suggests a slowing economy, with little expectation of forced easing by the Fed (as of yet). Peak contract is SFRU6 at 9644.5, up 27 from the previous Friday 9617.5. This contract is approaching 3.5%. In fact, halfway back from the September high of 9725.5 to Jan 10 low of 9581.5 is 9652.0. Will likely chop around this area going into Friday’s employment data.
Government has been adding 20-25% of jobs over the last couple of years. On Friday, NFP expected 160k from 143k. Unemployment rate still expected at 4.0% same as last month.
| 2/21/2025 | 2/28/2025 | chg | ||
| UST 2Y | 418.5 | 399.5 | -19.0 | |
| UST 5Y | 425.2 | 402.6 | -22.6 | |
| UST 10Y | 441.6 | 422.9 | -18.7 | |
| UST 30Y | 466.6 | 451.3 | -15.3 | |
| GERM 2Y | 210.2 | 202.5 | -7.7 | |
| GERM 10Y | 247.0 | 240.6 | -6.4 | |
| JPN 20Y | 205.3 | 202.7 | -2.6 | |
| CHINA 10Y | 175.0 | 177.8 | 2.8 | |
| SOFR M5/M6 | -29.5 | -48.0 | -18.5 | |
| SOFR M6/M7 | 3.0 | 2.0 | -1.0 | |
| SOFR M7/M8 | 7.5 | 8.5 | 1.0 | |
| EUR | 104.60 | 103.78 | -0.82 | |
| CRUDE (CLJ5) | 70.40 | 69.76 | -0.64 | |
| SPX | 6013.13 | 5954.50 | -58.63 | -1.0% |
| VIX | 18.21 | 19.63 | 1.42 | |
| MOVE | 91.83 | 104.46 | 12.63 | |
Nasdaq and bitcoin more interesting than rates…
February 28, 2025
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–So ends February. At yesterday’s close Bitcoin had fallen to its 200 day moving avg at 81963, this morning it has broken below, for now, with a low of 78225. Nasdaq-100 futures, NQH5, also just pierced the 200 DMA, 20644; traded slightly below this morning but is now slightly above. NDX and CCMP (Nasdaq 100 and Composite) are both above 200 DMA, 20186 and 18346, but the COMP is closer at 18544. The last time these two broke the 200 DMA was August 5 of last year, the culmination of the yen-carry scare. It was a one-day test, and then back to the races. I’m not really drawing any conclusions other than to think it’s reasonable to at least test long-term moving averages. However, I saw someone imply that Nasdaq is leading bitcoin. I would frame it the other way, that bitcoin is the canary. Friend Robert Luxem said on Jan 28: “Looks like my theory that Bitcoin/Crypto has become a 24/7 liquidity ATM for markets worldwide might carry some weight. The Chinese AI Deepseek story hit the tapes on Jan 26th, as well as the market. Bitcoin led the sell-off compared to the S&P Emini contract (blue) and also found the bottom first.” Luxem puts out first-rate analysis of crypto. Lmk if want contact info.
–I simply think that crypto ‘bros’ are likely, at the margin, to be capital constrained. A drawdown shakes them out first, and there’s a marginal (or margin call) spillover. Seeing this to a very small degree in betting stocks, for example Draft Kings has more than erased its mid-month earnings pop. BETZ is a gaming/betting ETF, and it too, appears to be under recent pressure (though well above 200 DMA). Just watching as a possible proxy for waning animal spirits… [disclosure I’m long DKNG puts]
–Ten-yr yield ended yesterday at 4.283%, up 3.4 bps, but looks to close out the month closer to 4.25%, the low for this calendar year. The most recent low was early December at 4.155%. Today we get the Fed’s preferred measure of inflation, the one that strips out any useful and necessary products whose prices have risen. Just kidding, it’s PCE prices, expected m/m 0.3 both headline and core. Yoy expected 2.5% from 2.6% last, with Core expected 2.6% from 2.8%. In this cycle, the lowest yoy Core was 2.63% for June ’24.
–All near SOFR calendars had made new lows Wednesday, but had small stabilizing rebounds yesterday. SFRH5/H6 still the most inverted at -59.25 (9569.75/9629)
Pause (in the TY rally) that refreshes
February 27, 2025
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–New buyer of 105k TYK5 113.5c: 19 covered 110-20 with 17d. Settled 22 vs 110-28+. On Tuesday, buyer of 100k TYK5 111.5c up to 40, settled 55 yesterday. Cash yield at futures settlement was 4.249%, down 4.7 bps on the day, and now well below the SOFRRATE and EFFR of 4.33%. It becomes more difficult to see domestic TBTF banks sopping up treasury supply at negative carry, though forward rates on the short-term curve are more like 3.75% (for example, SFRZ5 settled 9622.5).
–TYM5 has rallied 6 straight sessions, from 108-265 on 18-Feb to 110-285 yesterday. As the attached chart shows, implied vol has confirmed the move. Open interest had also surged, though we’re now more than halfway through rolls from March to June contracts and OI (aggregate) fell yesterday in TY by 250k. As of this morning TYM5 trades 110-15, a small, refreshing, pullback.
–In my opinion, the market is trading as if a disaster of some sort is brewing, but the vol chart isn’t quite confirming a breakout. All near SOFR calendars have made new lows as forward contracts once again telegraph lower rates. Front contracts are anchored as many Fed officials have repeated they’re in a ‘wait-and-see’ mode with respect to inflation. (PCE prices released Friday). As of yesterday’s settles, it feels like we could start getting some comments from ‘experts’ that the FED IS BEHIND THE CURVE. Cue a somber Jeremy Siegel to plead for emergency cuts. “NVDA didn’t rally after yesterday’s results! PANIC”
–On the SOFR strip the peak contract moved back a slot to SFRZ6 at a price of 9638 or 3.62%. Most-inverted 1-yr calendar is still SFRH5/H6, which fell 3.25 bps to a new recent low -60.75 (9570.25/9631). For the first time this calendar year, the red/green pack spread inverted. It had been as high as 11.5 in mid-January. From yesterday: red pack avg (2nd year) 9635.5 and green pack (3rd year) 9636.25.
–My interpretation is that the market sees sluggish growth ahead, which the Fed will not respond to unless inflation is falling. After running a 7% deficit to GDP last year, the deceleration in gov’t spending necessarily creates an adjustment. Initially there was a sense of euphoria that the private sector would easily plug the hole. That hope seems to be dissipating.
–Mexico and Canada tariffs apparently being instituted on April 2. Europe coming as well.. Washout in bitcoin is continuing. Yen has rallied vs USD since the start of the year. Seeing a small pullback today with $/yen 149.90. Early Jan was 158.50.
–RIP Gene Hackman. Not his best role, but here’s a clip:
Off topic
February 26, 2025
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I happened upon what I thought might be an interesting post:
Recession indicators are everywhere online — even if we’re not actually in one
https://mashable.com/article/recession-indicator-meme-explained
The author is Christianna Silva. The bottom of the piece outlines her credentials:
Christianna Silva is a senior culture reporter covering social platforms and the creator economy, with a focus on the intersection of social media, politics, and the economic systems that govern us. Since joining Mashable in 2021, they have reported extensively on meme creators, content moderation, and the nature of online creation under capitalism.
Before joining Mashable, they worked as an editor at NPR and MTV News, a reporter at Teen Vogue and VICE News, and as a stablehand at a mini-horse farm. You can follow her on Bluesky @christiannaj.bsky.social and Instagram @christianna_j.
I guess it’s one person, but kids these days like to throw around ‘they’ to refer to individuals (for reasons I can’t fathom). The article does include a lot of economic references, but draws no conclusion; it’s just a mish-mash of thoughts. So, I suppose this piece is published under the correct banner. (mashable). Well, maybe there IS a conclusion: “While we aren’t currently in a recession, that doesn’t mean it doesn’t feel like it.” Thanks. I didn’t have to go any further than the title.
I already wasted my time skimming through this piece, and I can only blame myself for what happened next: I was pulled deeper into the pointless abyss by an embedded TikTok link.
https://www.tiktok.com/@c.a.i.t.l.y.n/video/7428619623274122538
Here’s three minutes you won’t get back. Completely appropriate that this video too, is linked with ‘mashable’. Plenty of historical references. No point. From Neal Page in Planes, Trains and Automobiles: “… when you’re telling these little stories, here’s a good idea. Have a point. It makes it so much more interesting for the listener.”
Well, ok, maybe I’m being a bit harsh.
Here is my takeaway from Caitlyn: Dance music, which is oriented around partying, and is, according to her (or they) “dissociative” has gone from underground to mainstream. So that’s a negative indicator. Of something.
Clearly Caitlyn seems bright and educated. Maybe she makes money on TikTok. I don’t know the economics. But it seems as if her talents could perhaps be channeled into something useful.
What’s MY point? If this is what our current educational system is churning out…we’re in trouble!
In: Eurodollar Options
Large treasury option flow appears to favor upside
February 26, 2025
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–SMCI was able to sneak their audited financials to Nasdaq – just under the wire before being delisted. Now it’s all better. At least until we see NVDA’s results this afternoon.
–Yesterday saw vols pop amid some huge TY option trades. May TY calls added 125k on open interest. Flows were weighted to the upside in terms of TY price.
–10y yield closed 4.296, down 9.7 bps on the day. Lowest yield since early December, and now BELOW the Fed Effective yield of 4.33% and SOFR, last set at 4.34%.
By way of comparison, on Nov 8, after the election and one day post-FOMC, the yield was almost exactly where it is now, 4.31%. By 12/6 the low yield was 4.15%. By Dec 19, the day after the FOMC it was 4.56. Hi yield for the move was Jan 14 at 4.79%.
The ‘bond vigilantes’ seem to be throwing in the towel. Or maybe the idea of curtailed gov’t spending = lower growth is gaining traction. Some are pointing to weak consumer confidence from yesterday (98.3 vs 102.5 expected), but it’s way more than that. Feels like a flight into what may or may not be a safe haven.
MONSTER treasury option trades
TYK5 111.5 up to 40 paid 100k. Settled 45 with 37 delta
TYJ5 109/108.5p 1×2 -2 paid 30x60k (sold 108.5p) appears to be rolling up into long TYJ 109p, settles 11/6
TY wk1 110.75/111.25/111.50/112.0 c condor 15k sold at 5. Roll up into higher call spread
TYK 109p/111c rr vs 110-07, 71d -30k call at 13. New position, settled 28 for the call (29/57) with TY settle 110-175
BLOCK
TYK5 108.5p 21 paid 38k 21s new
TYJ5 112c 10k sold 15 16s new
TYK5 112c 15k sold 34 36s appears exit
TYM5 +24k 110-16 (about 10k over delta, net options was about 14k)
SFRZ5 9612.5/9562.5/9512.5p fly 17-17.5 paid 35k. Settled 16.25 ref 9620.5
SFRM5 9625/9687.5cs 3.0 paid 50k. New. Settled 3.0 vs 9570.5
Bitcoin tail-wagging
February 25, 2025
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–Bitcoin has broken out of its three month sideways consolidation to the downside, with the Feb future now at 88200, down nearly 5800. Range had been approx 92.5 to 105. Trapped longs suggest further downside, and NQH being down 89 at 21331 is a potential spillover indication. MSTR is in the red by 6% pre-open at 266 and SMCI which faces a filing deadline today (or could be de-listed by Nasdaq) is down 3.7% at 49.69. NVDA reports tomorrow.
–Yesterday featured slightly lower yields with 10s down 2.3 bps to 4.393%, getting very close to the current SOFRRATE of 4.34% (EFFR is 4.33%). New lows in near 1-yr SOFR calendars. For example, SFRH5/H6 settled -48.25, down 3.5 on the day (9570.25/9618.5). FFJ5/FFJ6 settled -55.0 (9568/9623). So, we’re back to pricing in the idea of 2 or more cuts over the next year, or, equal odds of 0 or 100. Peak contract on the SOFR strip is still SFRU6 at 9621.5; it appears as if reds (2nd year forward) want to press toward 3.5% as the next consolidation area. Interest rate futures are strongly suggesting weaker forward growth.
–WSJ headline (might have been from yesterday):
The U.S. Economy Depends More Than Ever on Rich People
The highest-earning 10% of Americans have increased their spending far beyond inflation. Everyone else hasn’t.
Monday morning consolidation
Feb 24, 2025
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–On Friday SPX -1.7% and Nasdaq Comp -2.2%. Led to flight-to-quality buying in treasuries and SOFR. Ten-year yield fell 8.2 bps to 4.416% and on the SOFR strip H6, M6, U6 (the first three reds) were the strongest, all +10.5 (9614.5, 9616.5, 9617.5) with U6 being the peak price contract. SFRU5 atm straddle, the 9593.25^, was 37.25 on Thursday, but on Friday the atm 9600^ settled 41.5. (9600^ on Thursday was 40.0s). From TO this morning (PNT options), “In case you missed, on Friday afternoon SOFR call skew and implied vol exploded for it biggest 1 day move in 6 months. No major news – stocks were lower – there was WILD panic not seen for a while and it caught people off guard.”
–I had expected follow-thru this early morning, but everything has had a small bounce (ESH a bit higher, treasuries lower).
–Important X-post (thanks JVL)
https://x.com/cynicalpublius/status/1893154644789977292?s=46
Here is a quote from Trump’s Exec Order: (citing the post above)
” Economic security is national security. The PRC does not allow United States companies to take over their critical infrastructure, and the United States should not allow the PRC to take over United States critical infrastructure. PRC-affiliated investors are targeting the crown jewels of United States technology, food supplies, farmland, minerals, natural resources, ports, and shipping terminals.”
–BABA has nearly doubled since January, 80 to 143. (Partly capital repatriation?) Financial nationalization may mean that overseas investments aren’t as safe as they used to be. The rapidity of the SVB bank run caught the Fed off guard. Imagine it on a global scale.
The ‘Countertrade’
February 23, 2025 – Weekly comment
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Fascinating story on slashgear.com about Pepsi’s dealings with the old Soviet economy.
Here are a few snippets:
To solve this problem, Pepsi orchestrated what is known as a “countertrade,” essentially allowing the Soviets to pay for Pepsi sodas with a commodity rather than cash. Bartering agreements were a common practice for the USSR in its international business deals in 1971. For example, even the Swedish band ABBA would receive its royalty checks in the form of oil and food goods.
So what did the Russians offer Pepsi in this initial venture? A drink of their own, vodka. As such, Pepsi became the official U.S. importer and distributor of Stolichnaya Vodka, making it the first company to bring authentic Russian vodka stateside since Prohibition.
Later, the deal became larger and more complicated:
Partnering with two Norwegian companies, Pepsi Co. traded for 85 Russian oil tankers worth nearly $2.6 billion —roughly $82 billion in today’s currency. The Norwegians facilitated the deal by scrapping the military vessels and leasing the tankers for their Cola partners. The Soviet Union, in turn, increased its Pepsi bottling locations to 50, and saw an overhaul of its shipyards. As Kendall put it during a company press conference, it was “the largest and most wide-reaching agreement ever signed in the field of consumer goods.”
When the Soviet Union collapsed in December 1991, it took much of [CEO] Kendall’s deal with it.
…Looking back, Kendall described it thus: “We had a multibillion-dollar contract with a nonexisting entity — the Soviet Union.”
Read More: https://www.slashgear.com/1778945/pepsi-navy-fleet-russian-submarines/
Archaic vestiges of another time. But then I saw this post on X:
Boeing is returning to Russia, they need titanium…
The company is going to allow Russian airlines to purchase aircraft and establish supplies of spare parts to the domestic market, and in return receive titanium from Russia.
You might have thought that the title of this piece, Countertrade, has to do with macro themes in the futures markets. And it does; we’ll get to that. But the stories above also have everything to do with the creativity of capitalism and markets: Dealmaking. Credit risk. Supply chain risk.
The over-arching theme reminds me of a speech given by the fiery former CME Chairman Jack Sandner at an annual meeting. “The CME isn’t a ‘trading’ business. It’s bigger. OUR business is “RISK MANAGEMENT”. (At the time the exchange was owned by member firms and members).
When we think ‘risk management’ we tend to think ‘insurance’. And if there’s one thing that has contributed to inflation and forward expectations thereof, it’s retail insurance for homes and cars. Yet, in the macro markets they’ve been giving premium away cheap. In last weekend’s piece I referred to the low level of the MOVE index at 84.57 and noted that VIX was scraping along the lows at 14.77. Kevin Muir (MacroTourist) reported last week that FX vol has been in the dirt. Well, we got a bit of a ‘countertrade’ this week with MOVE up to 91.83 and VIX up to 18.21.
There was an interesting X post Friday by Guilherme Tavares @i3_invest
The ratio between SKEW and Credit Spreads has reached its highest level ever.
In the past, similar high levels haven’t been favorable for equities. A high Skew Index suggests options traders are worried about a potential sharp decline in equity markets (tail risk). A narrow high-yield spread, however, indicates that the bond market isn’t yet pricing in significant credit risk or economic deterioration.
Who is the dumb money here?
I didn’t attempt to recreate this chart or verify the data, but intuitively it makes sense. As a sidebar, I refer to the etf HYG (high-yield). In late July’s yen-carry debacle, HYG had a brief, sharp, sell-off. Currently it’s near the high but has not been making new highs recently with SPX.
From a site called marketchameleon.com “…put open interest [of 5.0 million in HYG] has risen 11.9% in the last 5 days. Compared to its 52-wk avg of 4.5 million contracts, the current put open interest for HYG is higher than usual.” In the interest of FULL DISCLOSURE, I am personally long puts on HYG. This is NOT INVESTMENT advice. I’m just dabbling. But it may be worth noting that the yen is strengthening in similar magnitude to the mid-July move.
I can’t quantify the risks, but there seems to be a lot of dangling uncertainties piling up in the last week or so. The previous week’s repudiation of the high CPI print (TY completely erased the CPI sell-off the next day) was a tell. Then, the FOMC minutes revealed a possible ‘pause’ of balance sheet run-off, potentially removing a weight on treasuries. There’s a bit more press about Norinchukin’s unrealized losses. Friday there was a new corona-virus headline. Are any of these things ‘real’ enough to spark Fed easing? Maybe not, but when taken all together, it’s not a big stretch to say that interest rate futures and options seemed a bit cheap. The market already ignored CPI. So, pay 9571 for FFK5, risking 4 to make 21? (or 15.5 if skip March and go in May) Why not? (Buyer of 110k Thursday afternoon at 9571, settled 9574 on Fri). Load up on SFRU5 9625 calls vs futures? Why not. (Since Thursday, new buyer of over 100k from 10 to 11.5, settled 14.75 vs U5 at 9601.5).
I would mention one other thing that caught my interest. I listened to a Jeffrey Gundlach interview with Tony Robbins from Feb 11. Gundlach mentioned that he is only buying treasuries with coupons at 1% or lower. The reason: he’s concerned about a cram-down. Paraphrasing: “…what if the gov’t says that every bond with a coupon above some hypothetical, call it 1%, is now legally changed to just 1%? That is, a 7% coupon bond turns into 1%. So if you own 7s and wake up tomorrow and the coupon is 1, you’re down about 80% in price.” Now, this might be an extreme. But there are obviously a lot of out-of-the-box ideas being discussed at high levels, in order to avoid the debt-spiral trap. Iron-clad deals occasionally change, as Kendal discovered with the Soviet Union.
https://www.youtube.com/watch?v=rYCiwwSjmFY
Another DoubleLine hypothetical last week questioned whether MSFT debt is ‘safer’ than that of the US gov’t. Related to that, from @CapitalJurassic:
Rumor going around that $MSFT is paying penalties to get out of some data center contracts & power agreements– changing tone drastically on CAPEX growth. Might be another DeepSeek shockwave to the semi supply chain.
Another uncertainty. I suppose the takeaway from all of this is: Question your assumptions. Like the 1960s catchphrase ‘Question Authority’.
No Coke. Pepsi.
Note record level of OI in FV, TY and UXY futures as H/M rolls are in full swing.
| 2/14/2025 | 2/21/2025 | chg | ||
| UST 2Y | 425.5 | 419.0 | -6.5 | wi 418.5 |
| UST 5Y | 432.7 | 425.7 | -7.0 | wi 425.2 |
| UST 10Y | 447.4 | 441.6 | -5.8 | |
| UST 30Y | 469.4 | 466.6 | -2.8 | |
| GERM 2Y | 211.3 | 210.2 | -1.1 | |
| GERM 10Y | 243.1 | 247.0 | 3.9 | |
| JPN 20Y | 201.3 | 205.3 | 4.0 | |
| CHINA 10Y | 165.0 | 175.0 | 10.0 | |
| SOFR H5/H6 | -36.8 | -43.8 | -7.0 | |
| SOFR H6/H7 | -1.0 | -1.0 | 0.0 | |
| SOFR H7/H8 | 5.5 | 7.5 | 2.0 | |
| EUR | 104.93 | 104.60 | -0.33 | |
| CRUDE (CLJ5) | 70.71 | 70.40 | -0.31 | |
| SPX | 6114.63 | 6013.13 | -101.50 | -1.7% |
| VIX | 14.77 | 18.21 | 3.44 | |
| MOVE | 84.67 | 91.83 | 7.16 | |
https://uk.finance.yahoo.com/news/abba-music-soviet-oil-world-143000023.html
In: Eurodollar Options
Someone looking for a blow-up?
February 21, 2025
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–Just considering yesterday’s flows, and this isn’t particularly rigorous analysis, it seems to me that someone is betting on an accelerated easing timetable, and that longer dated treasuries may see rising yields either as a result, or as an independent move.
–Just after the FOMC minutes on Wed, which discussed a pause in the Fed’s balance sheet run-off, there was a large buyer of SFRU5 9625c covered. That buying continued yesterday paying 11.5 vs 9595 with 28d, I believe up to 50k (11.0s ref 9593). In any case, open interest in the calls rose 62k with total OI 152k. Adding to SFRU5 call open interest was a buyer of 50k SFRU5 9650c vs selling SFRZ5 9700c, taking 0.5 credit (had taken 1 credit on Wed afternoon. Yesterday’s settles 8.0 and 8.5, U5 9593 and Z5 9600). Considering these strikes in the context of Fed easing, current EFFR is 4.33 and the SOFR settings have been around that level or just above by a few bps. An ease would put EFFR at 4.08 or 9592, and SFRU5 settled 9593.0. So the 9625 strike is somewhat aggressive; something bad has to happen.
–Much more definitive was a new buyer of 110k FFK5 at 9571.0. Risk 4 to make 21 on an ease in March. The next meeting is May 7, so even if March results in no action, an ease at the May meeting would put FFK5 at 95.864. FFK5 settled 9572.0.
–On the TY side, early new buyer of TYJ5 108/110 risk rev vs TYH5 108-31, paid 8 for the put 50k. There was also a new buyer of ~20k TYJ5 109p cov 109-045, paying 41. Settled 39 vs 109-095 so 1’25 in the straddle. And a buyer of 20k TYK5 106p for 10.
–In conclusion: buying short-end calls and futures, buying TY puts. Invitation to put on 2/10 steepener? Not sure, but at 23.5 bps it’s near lower end of range… NOT ADVICE. DON’T DO THIS. YOU MIGHT LOSE. (There. A disclaimer).
–I would also note RECORD open interest in FV and TY at 7.147m and 5.621m respectively. A lot is driven by basis trades, which Vice-Chair for Supervision Barr touched upon in his comprehensive speech yesterday:
One area that has grown substantially is the Treasury cash-futures basis trade. The basis trade helps provide liquidity and price discovery in normal times, as hedge funds trade with asset managers and other financial institutions to align returns to holding Treasury securities and related futures. But the trade involves high levels of leverage, which can contribute to a rapid unwinding in positions and exacerbate market stress, as we saw in the spring of 2020. In principle, margining practices and participants’ risk-management activities should limit these risks, but individual firms do not account for the spillovers their actions can have on market functioning. These externalities suggest a role for regulation, and the central clearing mandate for Treasury market trading is an important step in supporting the resilience of this market. At the same time, we need to continue to consider how we can support the collection of minimum margin across trading venues and in bilateral trades to avoid loopholes and risks, and continue to monitor banks’ credit risk management practices with these hedge fund counterparties.
–I was taught early on that huge increases in open interest are potential tinder for the next big move. Longs and shorts have staked out their positions, one side is going to be badly wrong and have to scramble to cover. (That was from my technical analysis class given by Ken Shaleen when I was a runner on the floor. With all the complexities and ‘innovations’ in trading, I’m not sure if that idea still has merit, but I’m running with it).
–March treasury options expire today. Below is TY1 (rolling futures) with aggregate OI in blue.
