Labor side of dual mandate this week
December 1, 2024 – Weekly comment
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Yields plunged last week. I marked 5’s down 21.3 bps to 4.073%, 10s down 21.4 to 4.192% and 30s -21.6 to 4.378%. On the SOFR strip, every contract from SFRM6 to SFRM8 was up 21 to 21.5 bps. The prices: SFRM6= 9633.5 or 3.665% to a high on the strip of 9641 for U7, Z7 and H8 (3.59%). SFRM8 settled 9640.5 or 3.595%.
The big news items revolve around Bessent as choice for Treasury Sec’y, Tariffs with a capital T, and DOGE. Are yields declining because money is flooding into the US? DXY actually fell by 1.7% this week, but that was just a small retrace of the surge since October. The equation for GDP is C + I + G + (X-M). Consumption plus Investment plus Government plus (Exports minus Imports). G appears poised to fall. (X-M) is also at risk. A change in the composition of national income could easily make the Fed sit on their hands, to see how things shake out. According to the St Louis Fed site, Federal Net Outlays as % of GDP were 22.1% as of 2023. From 1992 to 2008 that number was 21% or lower, with a low of 17.5% in 2000.
Marc Andreesen was on Rogan and said that half of federal government workers have never returned to the office. (I have no idea if true). He said there’s one agency, where the union representing Federal Employees negotiated a deal that employees are required to come to the office just one day each month, so employees come in on the last day of the month and first day of the next month…2 days in 60 days…many have moved to cheaper locales. “DOGE announced you can work from home, just not for the Federal Gov’t.”
Or are yields declining because of generally softening conditions?
News this week includes ISM Mfg Monday. JOLTS on Tuesday, expected 7470k from 7443k. ADP Wednesday along with ISM Services. Beige book in the afternoon. Payrolls on Friday, expected 200k from 12k.
JOLTS has trended lower since the peak 12182 in March 2022. Last month’s 7443 was the lowest since early 2021 and is below the pre-pandemic level of early 2019. NFP at 12k last month was also lowest since Covid. The unemployment rate has been 4% or lower from late 2021 to June of this year. Now 4.1% with a recent high of 4.3%. Expected at 4.1 on Friday.
Having had a strong rally from end-of-June (-50) to end-of-September just after the Fed’s 50 bp ease (+22), 2/10 treasury spread has pulled back to 1.3 bps. Not exactly foreshadowing a restrictive Fed, but not loose either. The astounding 46% rally in the KRE regional bank index from late June to this week could easily see a pullback if the curve re-inverts. The positive aspect of lower regulation may collide with stingier liquidity from the Fed. From the Fed minutes last week: “A few participants discussed vulnerabilities posed by the growth of private credit and potential links to banks and other financial institutions.” Having missed SVB, perhaps the Fed will lean against the idea of a softer regulatory environment.
Putin last week:
Energy resources on the US market in some states are 3-5 times cheaper than in Europe and Germany. Entire enterprises, entire industries are shutting down in Germany and moving to the US. And they do it purposefully. But Americans are pragmatic people. Actually maybe they do the right thing in their own interests. But these [Germans/Europeans] it seems that if they’re told “we will hang you” they will have just one question “Should we bring the rope ourselves or you will give us one?” That’s it. So VW is shutting down, metallurgical companies are shutting down, chemical companies are shutting down, glass companies are shutting down. Hundreds or even thousands of people are being thrown out onto the streets.
The German bund ended the week at 2.09%, having been as high as 2.445% on Nov 7. Since the very beginning of 2024, this is the lowest yield apart from a spike down to 2.036% on October 1. Chart shows German bund, China 10y and Japan 20y, all closing in on 2%.
OTHER THOUGHTS/ TRADES
Below is a chart of the green SOFR pack, three years forward. Currently, it’s the average of SFRZ6, H7, M7 and U7. Level is 9639.375 or right around 3.6%. Yellow line is midpoint of FF target range.
In the past couple of years greens have surged three times to 9700 or above, ~3%. Each move was followed by unwinding over several months, to 4% or a bit higher. The market is currently near the midpoint, weighing fears of a slower labor market vs a growth spurt due to relaxed regulation/taxes, overlaid with concerns about massive debt issuance. The trend into year-end seems to support higher prices, lower yields. Friday’s data could have a large impact.
| 11/22/2024 | 11/29/2024 | chg | ||
| UST 2Y | 434.4 | 417.0 | -17.4 | |
| UST 5Y | 428.6 | 407.3 | -21.3 | |
| UST 10Y | 440.6 | 419.2 | -21.4 | |
| UST 30Y | 459.4 | 437.8 | -21.6 | |
| GERM 2Y | 199.1 | 195.7 | -3.4 | |
| GERM 10Y | 224.2 | 209.5 | -14.7 | |
| JPN 20Y | 189.0 | 185.2 | -3.8 | |
| CHINA 10Y | 208.0 | 203.3 | -4.7 | |
| SOFR Z4/Z5 | -51.0 | -63.3 | -12.3 | |
| SOFR Z5/Z6 | -12.5 | -17.0 | -4.5 | |
| SOFR Z6/Z7 | -3.5 | -4.0 | -0.5 | |
| EUR | 104.18 | 105.82 | 1.64 | |
| CRUDE (CLF5) | 71.24 | 68.00 | -3.24 | |
| SPX | 5969.34 | 6032.38 | 63.04 | 1.1% |
| VIX | 15.24 | 13.51 | -1.73 | |
| MOVE | 99.14 | 97.74 | -1.40 | |
Bond differentials don’t matter, then they do
November 29, 2024
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–Wednesday featured thin conditions. PCE prices exactly as expected with yoy 2.3% and Core 2.8%. Yields ended lower on the day, with tens down 5.8 bps to 4.246%. Ten year inflation-indexed note to treasury marked at a new recent low of 228 bps (exactly at yoy PCE). Treasury to tip spread this year has ranged from a high high of 243 in April to a low of 203 in early Sept, just prior to the FOMC. Fairly well anchored. High this month is 240.
–A few near SOFR one-year calendars made new lows, for example SFRH5/H6 now -47 (9577.5, +3/ 9624.5 +7). Every three-month spread from Dec’24 forward is inverted until U7/Z7 which is zero (9637/9637). Greens to blues slightly inverted, wouldn’t be surprised to see those pop back to positive, but a lot will depend on the Fed’s posture.
–Tokyo’s Core prices released today were higher than expected at 2.2% vs 2.1 expected. $/yen has fallen to 150 this morning from 151.50 yesterday. High on Nov 15 was 156.70. BOJ meeting is 19-Dec, with odds of a hike about 60% according to Reuters. I’ve attached a chart of 20y JGB to US. The spread is 261 bps and falling, with US 4.47% and JGB 1.86%. In the August yen-carry debacle, a fear was that rising JGB yields would siphon Japanese money back into the domestic market. US FOMC on Dec 18 is around 50/50 for a cut. Fed and BOJ swing by 50 bps?
–I’ve also attached an interesting chart of the French 10y vs that of Greece. Spread now zero. Do bond yields matter in terms of forcing fiscal discipline…or throwing it out the fenêtre? When Greece was considered a basket case, France was borrowing at zero (or negative). Now the tables have turned.
–Markets should be quiet today.
Thanks
November 27, 2024
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–Minor bounce back in curve. Yesterday I had noted re-inversion of 2/10 to just under zero, but using the new 2y note 2/10 is back to +4.8 bps (4.256/4.304) . Of course, just the one-month between 2y auctions is worth a couple of bps with the front end inverted as much as it is. Looking at first red to first gold on the SOFR strip, currently Z5 to Z8 (which I consider as a rough proxy for 2/10) it rose by 3.5 bps yesterday from a new recent low of -19.5 to -16.0.
–Minutes were released from the Nov 7 meeting. Headlines this morning mostly echo this one from FT: ‘Fed minutes show officials backed gradual pace of rate cuts.’
In the report, staff noted that the market had priced a less aggressive Fed. Anyone watching forward SOFR contracts is already aware of that. Since the Sept 18 FOMC, SFRU5, one year forward, went from 9703.5 to current 9602….down over 100 bps. Current EFFR is 4.58% so SFRU5 at 9602 is around 4%…a spread of just 60 bps. Currently we’re priced at odds of about 50/50 for a cut at the Dec meeting, which would put EFFR at 4.33.
–Continues to be buying of TY puts. Yesterday pre-open +20k each TYF 108p and TYG 106.5p for 8 and 8 (those appear to be covers). But then more Jan 108s, 107.5s and 107s were bought; settled 8, 6 and 4 with open interest in latter two +9k. Also a new buyer of week-5 109.75p for 3 covered 110-115, open int +11k, settled 2.
–Big data day with PCE prices expected 0.2 and Core 0.3 (m/m). Year/year expected 2.3 from 2.1 and Core 2.8 from 2.7. Jobless Claims expected 215k.
–Man of the people Illinois Governor JB Pritzker, who is vowing to stand in Trump’s way to single-handedly defend democracy, is said to be the mystery buyer of Ken Griffin’s $19 million condos.
“This most recent deal at No. 9 Walton is so far the city’s priciest sale of the year, and fourth-priciest of all-time in Chicago.”
Scene is at the ‘el’ stop just behind the CBOT annex
–Below are a couple of snippets from FOMC minutes. [My emphasis]
Regulatory capital ratios in the banking sector remained high; however, banks continued to hold large quantities of long-duration assets, leaving them more exposed than usual to an unexpected rise in longer-term interest rates. In the nonbank sector, leverage at hedge funds remained high, partly on account of the prevalence of the Treasury cash–futures basis trade. Life insurers’ leverage remained somewhat elevated, and they continued to maintain large holdings of risky and illiquid securities. By contrast, broker-dealer leverage remained low, as their capital increased in line with their assets. Vulnerabilities associated with funding risks were also characterized as notable.
Many participants noted that the slowing in these components of core inflation corroborated reports received from their business contacts that firms were more reluctant to increase prices, as consumers appeared to be more price sensitive and were increasingly seeking discounts.
A few participants cited business contacts who were using attrition, instead of layoffs, to manage the size of their workforce.
However, several participants cautioned that low- and moderate-income households continued to experience financial strains, which could damp their spending.
A couple of participants observed that the banking system was sound but that there continued to be potential risks associated with unrealized losses on bank assets. Many participants discussed vulnerabilities associated with CRE exposures, focusing on risks in the office sector. A few of these participants noted signs that the deterioration of conditions in this sector of the CRE market might be lessening. A couple of participants noted concerns about asset valuation pressures in other markets. Some participants commented on cyber risks that could impair the operation of financial institutions, financial infrastructure, and, potentially, the overall economy; these participants noted, in particular, vulnerabilities that could emanate from third-party service providers. A couple of participants also mentioned third-party service providers in the context of risks associated with brokered and reciprocal deposit arrangements. Several participants noted that leverage in the market for Treasury securities remained a risk and commented that it would be important to monitor developments regarding the market’s resilience. A few participants discussed vulnerabilities posed by the growth of private credit and potential links to banks and other financial institutions. A couple of participants commented on the financial condition of low- and moderate-income households that have exhausted their savings and the importance of monitoring rising delinquency rates on credit cards and auto loans. A couple of participants remarked on the successful implementation of the Securities and Exchange Commission’s money fund rules, noting that it would reduce financial stability risks posed by domestic MMFs.
Bonds surge
November 26, 2024
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–Huge bond rally with 10s down 14 bps to 4.267%. 2/10 spread re-inverted, now just under zero, though yesterday’s 2y auction was stellar (wi ended 4.252). Back calendar spreads on the SOFR strip made new lows, for example, SFRM5/M6 fell 6.5 to -32.0 (9592.5, +5.5 and 9624.5, +12.0). The peak contract on the SOFR strip keeps moving farther back in time, now it’s SFRH8, up 14 on the day to 9633.5. The catalyst was apparently the Scott Bessent as Treasury Sec’y announcement, though I’m not quite sure that’s based on solid reasoning. Gold was crushed, with GCZ4 down 94 to 2616.80, Bitcoin futures have pulled back from 100k and currently are just under 93k (Nov), CLF5 fell 2.30 bbl to 68.94. The dollar weakened.
–We’re now three weeks from the Dec 18 FOMC and for now, it’s a 50/50 proposition. Trump’s tariff announcements on Mexico, Canada and China were absorbed by the equity market, though NVDA yesterday erased all of November’s gains and closed just above 136, off about 11% from Thursday’s high print of 152.89.
–5yr auction today and FOMC minutes this afternoon.
Relief Rally
November 25, 2024
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–Bounce in treasuries and EUR being attributed to Bessent’s choice as Treasury Sec’y. Stock futures powering higher, precious metals under selling pressure. This shortened week features auctions of 2, 5 and 7 year notes, with 2’s today. Chgo Fed National Activity expected -0.15; Dallas Fed Mfg as well this morning. WTI slightly lower, but CLF5 still near $71/bbl. It’s been between 67 and 72 for the last 6 weeks.
–Curve flattened Friday. 2/10 closed at +4 bps, down 4.6 bps on the day and threatening to invert again. Weakest contract was SFRU5 down 3.5, but SFRU6 was +0.5 and SFRU7 +2.0. FFZ4 settled 9547.5, unchanged on the day, around 50/50 for cut or hold on Dec 18. (EFFR is 4.58. On 25 bp cut FFZ4 should settle 9452.5. 18 days at 4.58 and 13 days at 4.33). The Jan/Feb FF calendar gives an indication of odds for a cut at the Jan 29 FOMC. FFF5 9555.5s and FFG5 9560.5s, so spread of -5 bps. Not exactly 20% odds, but that’s close enough. So, although the market is now accepting that the Fed may remain a bit more restrictive than previously thought, there were still some disaster insurance plays…for example a new buyer of 35k SFRZ4 9662.5c for 0.25; strike is 110 bps away. I’m sure the buyer hopes they never play, because the implication is that hypersonic missiles will be flying around like a game of Galaga.
–FOMC minutes tomorrow afternoon. PCE prices on Wednesday.
Delusions
November 24, 2024 – Weekly Comment
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It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics…
The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
—John Maynard Keynes, The General Theory of Employment, Interest and Money
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.
― Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds
Chart above is by Guilherme Tavares @i3_invest posted 11/22. (thanks TS for highlighting and to YZ for MacKay quote).
The quotes above are perhaps somewhat contradictory. But the idea is that people can go mad alone (and perhaps help shape the maddening herd), or just run with the herd without the arduous effort of ever thinking about it. I think we’re in a ‘senses-recovery’ phase, but it might take a while.
The above chart represents that dynamic. According to BBG, market cap of NDX is $24.74T (NVDA is $3.47T), FTW5k -the Wilshire 5000- is $58.10T and GDP is $29.35T (St Louis Fed). The AI hype, as represented by the ratio of NDX to FTW5k peaked in June and appears to be reverting currently. By the way, this year’s peak is well above the dotcom surge in 2000.
I’m adding this X-post from last week from Arnaud Bertrand @RnaudBertrand
https://x.com/RnaudBertrand/status/1859446480198828360
The summary is that China sold $2 billion in USD denominated debt in Saudi Arabia at only a few bps above UST. Sort of a shot across the bow in terms of creating a parallel USD system. Here are a couple of interesting snippets:
This is where China’s strategy could become truly clever. China could use its US dollars to help Belt & Road countries pay off their dollar debts to Western lenders. But here’s the key: in exchange for helping these countries clear their dollar debts, China could arrange to be repaid in yuan, or in strategic resources, or through other bilateral arrangements.
In effect this would China placing itself as an intermediary at the heart of the dollar system, where the dollars still eventually make their way back to the US – just through a path that builds Chinese rather than American influence and progressively undermines the US’s ability to finance itself (with all the consequences this has on inflation, etc.).
In short this seems to be like some sort of Tai Chi ‘four ounces moving a thousand pounds’ (四兩撥千斤) move by China, using minimal force to redirect the dollar’s strength in a way that benefits China.
Last week I wrote about winning the war of incentives. Chairman Powell recently noted that emergency programs put in place during the pandemic were remarkable in that they were barely used; the fact that backstops were available restored market function. Same sort of idea.
Last week the US curve flattened. The 2y yield rose 7.2 bps to 4.367% while tens fell 1.8 bps to 4.406%. On the SOFR strip, the weakest contracts were SFRM5, down 10 at 9587 and SFRU5, also down 10 at 9596.5. By comparison SFRM8 and SFRU8 were UP 2.5 and 3.5 at 9619.5 and 9619. 2/10 spread is at risk of inverting again. In June this spread was negative 50 bps. On 9/25, just after the initial 50 bp cut, it was POSITVE 22.4. Friday was the lowest level since then. I guess it’s not too surprising…
We have a Fed wrestling with the idea of a higher neutral rate. We have a Federal Gov’t that last fiscal year ran a deficit close to 7% of GDP. The new economic orthodoxy is that issuance of high-yielding t-bills into affluent hands is stimulative, as interest payments become a more significant part of income. Now, the Federal Gov’t is being threatened with a serious diet (sans Ozempic). The big tech companies (many companies really) derive large amounts of revenue from the government. At the same time German’s 2y is imploding, down 13 bps on the week to 1.99%. Resulting strength in USD makes our exports more expensive. It’s not necessarily the case that restraint in fiscal activity causes recession, but coupled with a Fed that is less inclined to ease, it’s a significant risk.
On this holiday shortened week, we have FOMC minutes on Tuesday afternoon. Wednesday includes 3Q GDP revision, Durables, and most importantly, PCE price data. Month/month expected 0.2 with Core 0.3. Year/year expected 2.3 from 2.1 and 2.8 from 2.7. No data on Friday.
| 11/15/2024 | 11/22/2024 | chg | ||
| UST 2Y | 429.5 | 436.7 | 7.2 | wi 434.4 |
| UST 5Y | 429.4 | 429.6 | 0.2 | wi 428.6 |
| UST 10Y | 442.4 | 440.6 | -1.8 | |
| UST 30Y | 459.7 | 459.4 | -0.3 | |
| GERM 2Y | 212.2 | 199.1 | -13.1 | |
| GERM 10Y | 235.6 | 224.2 | -11.4 | |
| JPN 20Y | 188.4 | 189.0 | 0.6 | |
| CHINA 10Y | 207.3 | 208.0 | 0.7 | |
| SOFR Z4/Z5 | -57.0 | -51.0 | 6.0 | |
| SOFR Z5/Z6 | -5.5 | -12.5 | -7.0 | |
| SOFR Z6/Z7 | -1.5 | -3.5 | -2.0 | |
| EUR | 105.36 | 104.18 | -1.18 | |
| CRUDE (CLF5) | 66.92 | 71.24 | 4.32 | |
| SPX | 5870.62 | 5969.34 | 98.72 | 1.7% |
| VIX | 16.14 | 15.24 | -0.90 | |
Taking my bitcoins and moving to Sardinia
November 21, 2024
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–Note: Due to a glitch in the matrix, this note may come out sporadically, if at all, going forward.
–Yields rose yesterday with tens +2.9 bps to 4.404%. On the SOFR strip, SFRZ5 was the weakest at -5.0 to a price of 9610.5 or 3.895%. Five yr yield was +3.2% 4.273%. SFRH5 settled -2 at 9575.5 or 4.245%, just under the 5y yield. In fact, every SOFR contract from H5 forward is at a yield below the 5y, so there’s small positive carry going into next year. Peak SOFR contract is currently U7 at 9621. The forward three years starting Z5 average around a price of 9615 or 3.85%. It’s the long bond that you’ve got to worry about….currently 4.59%; 5/30 is 32 bps
–Major factor yesterday was a report that Ukraine was firing UK-made missiles (parts made in China) into Russia. Equities sold off but then rebounded going into day’s end. Once again there was a buyer of SFRZ4 9600c for 0.5. Besides that, there wasn’t much in the way of disaster buying. DXY remains BID near 107. Bitcoin is the star of the show, now nearing 98k. NVDA results were seen as slightly disappointing with the stock down ~ 3% pre-market.
–News today includes Philly Fed expected 8.0 from 10.3. Jobless claims 220k. Existing home sales.
–Debating the move to Sardinia. (A town there is making a pitch to dissatisfied Americans). The problem of course, is that it might be lousy with Democrats. On the one hand, Ellen DeGeneres is moving to London…dodged a bullet there. On the other hand, Eva Longoria is spending time in Spain…maybe Sardinia is an attractive home base.
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20y auction and NVDA post-close
November 20, 2024
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–Early action was dominated by news of Putin updating Russia’s nuclear doctrine. Stocks lower, fixed income bid. Those moves sputtered; stocks ended positive and near SOFR contacts were slightly lower on the day while yields from 5 yrs out were lower by 3 to 4 bps. SFRZ5 to SFRZ8 were +2.5 to +3.5 with Z5 9615.5 and Z8 9619.0, nearly the same price at a yield around 3.85%. Ten year yield down 3.3 to 4.375%. There were a few ‘disaster’ buys: +15k SFRZ4 9600c for 0.5. +15k SFRH5 9750/9800cs for 0.5 (SFRH5 settled 9577.5). And a few much more reasonable buys for continued Fed eases, for example, SFRZ4 9562.5/9568.75 bought for 1.0.
–Seller of 30k SFRM5/Z5 spreads. Settled -18.5 (9597/9615.5) down 3.5 on the day. Open interest up in both contracts, +37k and +5k. The six-month spread in front, H5 to U5 settled -31.5 (9577.5/9609) so curve roll obviously favors this trade. Not to mention the fact that as recently as early October the near 3-month spread was -50.
–Sigh of relief as SMCI was +31% at 28.27. Of course, in July it was 90. NVDA reports after the close. 20y auction today.
Doomsday clock is ticking
November 19, 2024
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–Stocks appear to be starting the session on their back foot (ESZ4 -30). Something about Putin updating Russia’s nuclear doctrine as Biden gave a green light for Ukraine to use western weapons on internal Russian targets. Sounds ominous, but prolly good for bitcoin…right? That’s where we are now…
–Lina Khan closing out her term by pressuring Google to divest Chrome. Nope, we’ll keep chrome but we’ll tearfully part with Nest (to anyone who will take it).
–Housing starts today expected 1.33m. Rate futures quiet yesterday with red, green and blue SOFR contracts +1.5 to 2.0. 10y yield down 1.6 to 4.408%. Treasury vol slightly lower going into Friday’s expiration. TYZ4 109.5^ settled 0’34.
Data’s not this week’s catalyst. It’s Geopolitics
November 18, 2024
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–Friday featured a slightly flatter curve in the wake of Powell’s comments Thursday. SFRZ4 -4 at 9554.5, Z5 -1.0 at 9611.5 and Z6 unch’d at 9617.0. 10y yield up 1.4 bps to 4.424%. Odds of an ease at the Dec 18 FOMC are still favored, but being squeezed slightly lower. FFZ4 settled 9548.5, down 2.0. No ease means a final settle at 9542 (EFFR = 4.58) while a 25 bp cut is ~9552.5. So every bp is about 10% of probability. On Friday even Goolsbee, one of the most dovish Fed Presidents, said the dispute on the value of the neutral rate could mean slower rate cuts. The market had already shifted in that direction, but it’s still important to note.
–SPX on Friday touched the halfway mark of the pre to post-election surge. Now it’s all about picking winners and losers of the new policies. Drug companies shed pounds instantly at the announcement of RFK for HHS Sec’y. Banks are bid.
–Biden authorized strikes on Russian targets; dangerous escalation. Putin dangled the carrot of cheap energy to Germany’s Scholz: de-escalation.
–Dept of Defense failed its seventh consecutive audit, but hopes to be able to pass by 2028. There’s a DOGE target.
–It’s a slow week for US economic data. 20y auction on Wednesday. TYZ4 109.5^ expires Friday, settled 0’44 ref 109-17. This morning TYZ4 prints 109-11, continuing the downward trend. Friday’s low is 108-30. TYZ4 109p have 80k in OI (0’09s), 108.5p have 71k (0’03s). TYZ 110c settled 0’10 with 35k open.
