Stand and De-lever
December 7, 2025 – Weekly comment
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This week BOE warned about the basis trade in gilts. The Fed has also been monitoring basis trades. On 4-Dec, the US Office of Financial Research released a report ‘Sizing the US Repo Market’. “According to new data collected by the OFR, the U.S. repurchase agreement (repo) market averaged about $12.6 trillion in daily exposures in Q3 2025, a number that is about $700 billion larger than previous estimates.” Of the $12.6T, non-centrally cleared bilateral repo (NCCBR) accounted for $5T. “In Q3 2025, U.S. Treasuries collateralized 88.9% of exposures in the cleared repo segments, but only 61.8% of NCCBR exposures and just over half (52.6%) of the exposures in tri-party.”
I have no idea if this is related, but Friday morning featured a flurry of Treasury futures buys on block trades. The lines I highlighted indicate 90k ($9b) FVH6 bought 109-11 to 109-1175 and 80k TYH6 bought 112-225 to 112-240. FVH6 settled 109-075 and TYH6 at 112-165. Prelim open interest in FV +47k and in TY FELL 35k (consistent with short covers in TY).
| 09:05:45 AM | Future | 5-Year T-Note Futures | ZFH6 | 109’110 | 45,000 | 109’110 | ||
| 08:47:05 AM | Future | 10-Year T-Note Futures | ZNH6 | 112’235 | 10,000 | 112’235 | ||
| 08:41:01 AM | Future | 5-Year T-Note Futures | ZFH6 | 109’117 | 25,000 | 109’117 | ||
| 08:32:02 AM | Future | 5-Year Eris SOFR Swap Futures | YIWZ25 | 101.65 | 447 | 101.65 | ||
| 08:21:35 AM | Future | 5-Year T-Note Futures | ZFH6 | 109’135 | 7,000 | 109’135 | ||
| 08:13:43 AM | Future | 10-Year T-Note Futures | ZNH6 | 112’240 | 20,000 | 112’240 | ||
| 07:59:31 AM | Future | 10-Year Eris SOFR Swap Futures | YIYH26 | 102.32 | 20,000 | 102.32 | ||
| 07:40:14 AM | Future | 5-Year T-Note Futures | ZFH6 | 109’110 | 20,000 | 109’110 | ||
| 07:32:34 AM | Future | 5-Year T-Note Futures | ZFH6 | 109’110 | 5,000 | 109’110 | ||
| 07:31:43 AM | Future | 10-Year T-Note Futures | ZNH6 | 112’225 | 25,000 | 112’225 | ||
| 07:28:41 AM | Future | 10-Year T-Note Futures | ZNH6 | 112’235 | 25,000 | 112’235 |
Quick thought about official monitoring of trades that could possibly shatter markets. There was a guy named Zeets who was part-time clerking for his brother on the CME floor while training to become a high-school teacher. One of his assignments was to be a classroom observer. He said between classes a fight broke out in the hallway. Dave, who I worked with, asked “What did you do?!” Zeets, “I observed.”
It’s one thing to identify a potential problem. It’s another to intervene. Especially when the trade is a pillar of demand for US Treasury supply.
I had thought TY buys were gamma related, as there had been huge covered-call buys in TYF 113.5c and 114c early to mid-November. If there hadn’t been adjustments in the meantime, there would easily be 80k short futures to cover, leaving residual long calls. That idea doesn’t account for FV buys. In any case, even with this significant buying, contracts settled lower. And that’s going into a Fed meeting which is highly likely to result in a 25 bp cut. On the week, US 5y yield rose 11.9 to 3.715% and 10s rose 12.4 bps to 4.137%. The 10y bund rose 10.9 to 2.797% and JGB +13.3 to 1.939%. Strong employment figures caused a jump of 27 bps in Canada’s 10y, up to 3.414%!
Below is a chart showing March ’27 contracts of STIR contracts: Euribor in gold, Corra in red, SFR in white and Sonia in blue. Vertical violet lines are Fed cut dates. Euribor new low since April.
Like global 10y yields, forward STIR rates are moving higher.
I have been tracking SFRH7 as it has been the peak SOFR contract for quite some time, and might be loosely framed as the expected ‘terminal rate’ for Fed policy. The Fed eased on Sept 17 and H7 settled 9705. The week prior on 10-Sept it was 9712.5 (expecting the ease). The week after on 24-Sept it was 9696.0 (buy the rumor, sell the fact). The next Fed cut was Oct 29. SFRH7 settled 9693 that day. The week prior, on 22-Oct it was 9709.5 and the week after on 5-Nov it was 9684.0 (buy the rumor sell the fact). On 3-Dec, a week prior to this week’s FOMC, SFRH7 was 9697, and it settled Friday at 9686.
Since early August, SFRH7 has settled between 9716 and 9684, 16 bps on either side of 3%, and that’s with 50 bps of ACTUAL ease and another 25 expected on Wednesday. I suspect the market is NOT taking down the terminal rate because the bonds won’t accept it; bond yields may shoot higher. It feels an awful lot like concerns of a renewed inflation jolt might take hold.
Below is a chart of the US 10y yield in white, with the yield on constant second red SOFR contract in red (currently SFRH7). Again, violet verticals are Fed cut dates.
FOMC is Wednesday. Treasury auctions of 3s, 10s and 30s Monday, Tuesday and Thursday. On Friday, Q3 Household Net Worth (Fed’s quarterly Z.1 report) will be released. SPX gained 7.8% in Q3, so I’m sure net worth will be at a new high. In the five years from Q2 2020 to Q2 2025, HH Net Worth went from $111.729T to $167.260T, an astonishing gain of 50%. (St Louis Fed). I’m not so sure new highs in HH Net Worth will be trumpeted quite as loudly by mainstream press this time. The rich getting richer isn’t a narrative the average family finds helpful.
| 11/28/2025 | 12/5/2025 | chg | ||
| UST 2Y | 348.9 | 356.2 | 7.3 | |
| UST 5Y | 359.6 | 371.5 | 11.9 | |
| UST 10Y | 401.3 | 413.7 | 12.4 | |
| UST 30Y | 466.3 | 479.1 | 12.8 | |
| GERM 2Y | 202.6 | 209.3 | 6.7 | |
| GERM 10Y | 268.8 | 279.7 | 10.9 | |
| JPN 20Y | 282.8 | 291.1 | 8.3 | |
| CHINA 10Y | 183.0 | 183.1 | 0.1 | |
| SOFR Z5/Z6 | -68.8 | -58.3 | 10.5 | |
| SOFR Z6/Z7 | 4.0 | 7.5 | 3.5 | |
| SOFR Z7/Z8 | 19.5 | 19.0 | -0.5 | |
| EUR | 115.98 | 116.42 | 0.44 | |
| CRUDE (CLF6) | 58.55 | 60.08 | 1.53 | |
| SPX | 6849.09 | 6870.40 | 21.31 | 0.3% |
| VIX | 16.35 | 15.41 | -0.94 | |
| MOVE | 68.95 | 67.28 | -1.67 | |
