Vanishing Liquidity
March 27, 2026
****************
–The broad overview appears to be one of capital starvation. Early Thursday morning, yields were higher across the board. 5y ended at an explosive new high 4.096, up 58 bps just since the end of Feb (+12.8 on the day).. 10’s surged to 4.416 (+9.2), highest since last July and up 48 since end Feb. Stocks were lower, as were precious metals. Our old Mag7 friends met Thor’s hammer with significant new lows in MSFT (-32% from Oct hi) and META (-31% from Aug hi) and NVDA looking vulnerable to wash-out after long sideways topping pattern.
–Yesterday on X I posted attached 2/10 chart, which tends to anticipate Fed policy. Currently 43, it’s nr lows from 2H last year. Important level to hold…if it doesn’t, suggests hikes on way. Perhaps coincidental, but it seems to me that ever since Trump/Pulte thought it would be a good idea to bring criminal charges against Powell, the perception of non-ending Fed liquidity has been called into question, and the evidence is becoming more pointed. Bond issuance is likely to rise, energy infrastructure is going to require massive money. EFFR (Fed Effective) is still 3.64, but the peak SOFR contract is SFRH’28 at 9645 or 3.55, just 9 bps under EFFR (recall reds had tradeed up at 9712 as recently as March 2). The front Sept SOFR contract settled -6.5 at 9617, or 3.83, 19 bps ABOVE EFFR. It’s not a welcoming financial environment, and even Trump’s late pronouncement to delay hitting Iran energy infrastructure until April 6 registered only a brief rally.
–A few months ago, I had mentioned that the first SOFR straddle over 100 bps was way out into the greens. Now, just a year out, SFRM7 9625^ settled 103.5 ref 9623 in M7. Vol absolutely exploded yesterday, another signal of liquidity problems. Front atm straddles in SOFR were up an astounding 10 bps! For example, SFRU6 9612.5^ settled 55.5 on Thursday ref 9617. On Wednesday, SFRU6 9625^ settled 45.5 vs 9623.5. Panic.
–April treasury options expire today. On Wed, TYJ 110.5^ settled 31 ref 110-18. Last print this morning is 109-28, with 110^ trading 22. They will try to peg 110 strike, but it’s likely to be a nail-biter.
