What if Fed Cuts in Dec and no one cares
November 24, 2025
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-Friday’s price action depended heavily on this early morning quote from NY Fed President Williams:
“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions. Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals.”
–Jan Fed Funds (FFF6) ripped 7.5 bps higher to a price of 9630.5, from just under 50/50 odds for an ease on Dec 10, to around 70% odds of an ease. SFRZ5 settled 9622.5 (+4.5). Z5 9625 straddle settled 10.0. The spread of FFF6 to SFRZ5 is at its peak of 8 bps. It was 1 to 3 in September. Should be more like 5 or perhaps even lower depending on odds of another ease on Jan 28, but repo tightness is holding SFRZ5 down, even as the Fed insists there’s no stigma associated with using SRF (standing repo facility).
–SOFR contracts +3.0 to +5.5 in the first five years. Ten-yr yield fell 3.9 to 4.063%. Slight new highs in 2/10 at 55.1 (+0.5) and 5/30 at 109.5 (+3.6). Both of these spreads have been sideway for months and are still in below the highs for the year. Max 2/10 this year has been 65/66. Auctions of 2, 5 and 7 year notes Monday, Tuesday, Wednesday.
–Not sure if the resignation of Marjorie Taylor Greene from Congress is important, but at the margin it likely erodes Trump support. Midterms are a year away. Added urgency to cut rates? In any case, forward rates still aren’t embracing the idea of a series of cuts. SFRH6/M6 did make a new recent low of -26.5 (9645/9671.5) and SFRH6/U6 new recent low -44.5. But consider the next six-month spread forward, SFRU6 to SFRH7, it’s only -11 bps (9689.5/9700.5). SFRH7 is the peak on the SOFR strip at 9700.5, right around 3%. If the Fed cuts in December, the new target will be 3.5 to 3.75%, so SFRH7 is only 62 bps away from what will be the new midpoint.
–A couple of interesting notes from Fed Gov Cook speech Thurs:
Trading venues are also taking steps to mitigate the risk stemming from the “black box” problem associated with AI-enabled trading algorithms. For example, the Chicago Mercantile Exchange (CME) recently reminded its members that they must be able to fully explain and reproduce any decisions or actions taken by their algorithms on the CME market. [*pulls out dartboard]
Hedge funds’ holdings of Treasury cash securities—that is, Treasury bills, notes, and bonds—have increased from representing about 4.6 percent of total Treasury securities outstanding in the first quarter of 2021 to representing 10.3 percent in the first quarter of this year, just above its pre-pandemic peak of 9.4 percent.
–Berkshire owns $360 billion in t-bills. In the ‘hedge fund’ category? Easing SLR under serious discussion?
