Sell bonds, wear diamonds
July 13, 2025
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Sometimes, all you have to do is look at something simple. Economic data might be murky. But the chart below is clear.
Yogi Berra: “You can observe a lot just by watching.”
DUBLIN, July 10 (Reuters) – JPMorgan CEO Jamie Dimon said on Thursday he thought the financial market was underestimating the possibility of U.S. interest rates climbing higher, a prospect he described as a “cause for concern”.
I don’t even care for the conclusion I am drawing from this chart. I hope I’m wrong.
What stuck with me from a time long ago is something that Tom Baldwin said. Baldwin was then the biggest local in the bond pit, which was then the main futures contract in Chicago. As I recall it, he was being interviewed on some financial program, and he was sitting there, slouched back in a chair in his purple trading coat, ragged tie halfway down his shirt. That was at a time when financial types on TV wore suits. Baldwin was talking about the bear bond market which was then in traction.
I believe the year was 1987 (pre-crash). There were some monster bond moves in the 80s and early 90s. From mid-1986 to early 1987 Fed Funds were at the then-low rate of around 6%. From March 1987 to October, the bond yield surged from 7.5% to nearly 10.25%. Perhaps this interview was from June, Baldwin said when bonds started to sell off he initially fought it, buying the break. Then he said, “I could see the selling just kept pouring in, so I switched and just went with it.” That’s a hard thing to do. But the logic was starkly simple.
I’m not positive I have the timing of this story right, but I know I have the details of the interview correct. Baldwin was a huge trader; he bought the Rookery, an office building on Lasalle street for $28 million in 1989 and restored it. The Rookery might have the most beautiful lobby in Chicago.
https://www.amazon.com/Saving-Treasure-Chicagos-Beginnings-Restoration/dp/1646699157
The environment now simply looks like global bond yields want to go up.
The vertical green line starts from December 2, about one month after the US election. Since then, UK, US, German and Japanese 30-yr yields have trended higher. The 10-yr is generally used as a benchmark, why look at 30s? In my opinion, that’s where the ‘term premium’ or ‘lack of confidence in governments’ asserts itself. Blast-off in bitcoin tells a similar story: maybe the long-bond isn’t going to cushion anyone’s portfolio from anything. Maybe silver is saying the same thing. (Gold/silver ratio has plunged from a spike up to 104.7 post-Liberation Day to a new low for this calendar year of 87.18). Maybe it’s worth focusing on the fringy stuff.
Early in the administration when criticism of Powell was at a relative whisper compared to today, Bessent said he was more concerned with 10y rates than the Fed’s short-term rate target. Here’s a Feb 6 headline from CNBC:
Bessent says Trump is focused on the 10-year Treasury yield and won’t push the Fed to cut rates
Like a lot of things, that’s gone right out the window.
The treasury is likely to favor issuing t-bills rather than long bonds. The BBB has violently jerked US priorities from getting spending under control to juicing growth in an attempt to outpace inflation. Brilliant idea, but global long rates are saying, “I don’t quite like the smell of that.” And the administration is now hyper-focused on short rates because a cut in funds immediately transfers to short term bill rates and will save the gov’t some money. In the short term. Short. Sighted.
Markets have been slow, making it tempting to take a month off. Nothing happens in August, right? In August of 2015 China devalued. Looking back, it’s barely noticeable on the chart. What if Trump fires Powell and Xi is removed from power, all in August? That would be pretty fun. Usually in the US there’s a cabinet shake-up after a year of a new administration. This year it’s likely to come in August. Everything’s in hyper-drive.
OTHER THOUGHTS/ TRADES
Trade from last week:
SELL 3x FVU5 107p at 8.5 and BUY 1x USU5 110p 31
FVU5 107p settled 9 ref 108-03, so -0.5 on 3 = -1.5. USU5 110p settled 43 ref 112-29, +13.
Not likely to be over. Roll bond puts down and sit on your hands.
Below is original rationale for trade. At Friday’s settle CTD bond was 4.75% of 11/43, giving the USU contract DV01 of $136.90.
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The current Cheapest-to-deliver bond is 4.75% of 2/41. Using that bond makes the DV01 on USU5 $125.30 per $100k. However, as the yield moves higher, the CTD changes. Using Bloomberg’s CMS screen, if the yield on the contract goes up by 25 bps (to a price of 111-04) then the CTD becomes 4.75% of 2/43. The DV01 on USU5 increases from $125.30 to $138.70. That’s an increase of >10%. Which, in my mind, should mean an increase in vol of 10%. An increase of 50 bps makes the CTD 3% of 11/44, which has a current DV01 of $157.60. Of course, due to convexity these DV01s will get a bit smaller as yields go higher. But the implication is that otm bond puts should probably be more expensive. The CTD on the 5y note does NOT change with a move of 100 bps either way. My inclination is to SELL 3x FVU5 107p, 8.5/64 (settle ref 108-1125 with -0.17 delta), and BUY 1x USU5 110p, 31/64 settle ref 114-08 with -0.18 delta. Vega on the 110 put is approx. 7/64’s. I.e. if the vol goes from 11.7 to 12.7 then the premium on the put rises from 31 to 38.
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This week:
Tuesday: CPI expected +2.6% yoy vs +2.4% last.
Earnings: JPM, C, WFC
Wednesday: PPI, Beige Book
Thursday: Retail Sales, Jobless Claims
Friday: Housing Starts
| 7/3/2025 | 7/11/2025 | chg | ||
| UST 2Y | 388.0 | 391.2 | 3.2 | |
| UST 5Y | 393.1 | 399.0 | 5.9 | |
| UST 10Y | 433.4 | 442.1 | 8.7 | |
| UST 30Y | 485.1 | 495.6 | 10.5 | |
| GERM 2Y | 183.1 | 189.6 | 6.5 | |
| GERM 10Y | 261.3 | 272.3 | 11.0 | |
| JPN 20Y | 235.2 | 250.7 | 15.5 | |
| CHINA 10Y | 164.2 | 166.4 | 2.2 | |
| SOFR U5/U6 | -89.0 | -86.0 | 3.0 | |
| SOFR U6/U7 | 5.0 | 4.0 | -1.0 | |
| SOFR U7/U8 | 20.0 | 21.0 | 1.0 | |
| EUR | 117.86 | 116.90 | -0.96 | |
| CRUDE (CLQ5) | 67.00 | 68.45 | 1.45 | |
| SPX | 6279.35 | 6259.75 | -19.60 | -0.3% |
| VIX | 16.38 | 16.40 | 0.02 | |
| MOVE | 86.09 | 85.48 | -0.61 | |
