Plenty to talk about…
May 15, 2025
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–CLM5 (wti crude) down 2.49 at 60.66 this morning as Trump says close to deal with Iran. Stocks also pulling back.
–News today includes Retail Sales expected 0.0 m/m and +0.3 ex-auto and gas. WMT earnings. PPI expected +0.2. Yoy 2.5% from 2.7 and Core 3.1% vs 3.3 last. Powell at 8:40 on Framework Review. The last review in 2020 featured the ill-fated FAIT (average inflation targeting) which was supposed to allow inflation to average a bit over target in order to compensate for previous shortfalls below the 2% target. If really working on an average we should be targeting ZERO for the next few years.
–30y bond yield at futures close was 4.964% (USM5 112-12s). However, as USM traded post-settle at 112-09 the yield moved to 4.973, essentially matching the high of the year set in January at 4.977. This is mostly a long duration issue. For example, the Jan high in 10y treasury yield was 4.794% and yesterday late it was 4.536%. As mentioned earlier in the week, Kevin Muir noted that higher yields would cause a shift in cheapest-to-deliver bonds to much longer duration issues into US and WN. I think that’s a big part of the price action, along with general distrust of gov’t finances, etc. The tv gurus are going to chalk it up to “term premium”. Note also a slight new recent high in 10y treasury to tip breakeven to 239 bps. It was more like 240 to 250 in Jan and Feb but the recent low was below 220.
–If long end yields keep rising and CTD shifts to higher duration, that would also imply higher bond vol on a relative basis, which is another current feature. Might also tend to put a bid into gold SOFR midcurves. 4QM 9612.5^ settled 25.5 ref 9609 in SFRM9. 0QM 9637.5^ settled 27 ref 9643.5. Worth looking at otm 4QM or 4QN puts?
–I didn’t see the actual recommendation so I won’t mention the bank, but the trade was to sell SFRZ5/Z6 at -34 with a stop at -10 and target -70. Risk 24 to make 36. Not spectacular, but of course curve roll is at your back. M5/M6 is -73.5 and U5/U6 is -59.5. Z5/Z6 settled -37.5 (9614/9551.5). In mid-March the spread was -20 and in the beginning of Feb it was 0. The risk is an outlier event or something like a negative payroll number that causes nearer contracts to explode higher (think back to SVB collapse). In any case, after I saw this rec, there was an option trade expression of ‘sell z5/Z6’. A buyer of 40k SFRZ5 9600/9562.5ps vs 0QZ 9625/9587.5ps, paying 2 for Z5. Settled 14 and 11.75 so 2.25. Just comparing this Dec structure to same strikes in Sept, one can see how the roll works in this trade’s favor: SFRU5 9600/9562ps settled 20.0 (ref 9593) and 0QU5 9625/9587ps settled 9.75 (9650) so spread to spread settled +10.25. Just bear in mind a friend’s warning: “The road to hell is paved with positive carry [roll]”
