Yields going down faster than you can say LULU Lemon
September 5, 2025
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–Payrolls today expected +75k with a rate of 4.3%. Perhaps unsurprisingly, interest rate futures went out on the beat highs, as whisper numbers are low. They’ve been inhaling calls. FFV5 settled exactly at 4.08% or 9592.0, representing a 25 bp cut on 17-Sept. However, FFF6, which covers both the 29-Oct and 10-Dec FOMCs, settled 9627.5 or 3.725%. If the Fed were to cut 25 at each of the next three meetings, EFFR would be 3.58 or 9642. Meaning…there’s still upside if numbers are awful. At futures settle: 10y -3.7 bps to 4.174%. Peak SOFR contract H7 9797, +3.
–Somewhat interesting that the SOFR curve from reds to deferred is edging flatter. For example, reds to golds (2nd to 5th years) is just over 51 bps, off from the high of 60 in Aug. However, the 2/10 treasury spread is 58.4, only about 3.3 off the high of 61.7 made last week. 5/30 is hugging recent highs at 122 bps, as long-end markets of the western world compete for funding their bad budgets. Red to deferred SOFR calendars typically go BID in an easing cycle, so the flattening here might be a small warning for those betting on aggressive easing. Or, it might be tacit appreciation that the US Treasury will NOT let long-end rates move higher. In any event (THIS IS NOT A REC) I would favor something like +SFRZ6/-SFRZ9 which settled 49 (9704/9655). Worth watching….
–On a more mundane note, POWERBALL in the US is up to $1.7 billion. Note to self: take the front-end payment of $770 million. Below is a story about lurking credit risk, perhaps even when it’s clear that underlying assets are impaired (think CRE. And Illinois). In this case, it was the Publishers Clearing House…you know the one, where they walk up to the door with the oversize check and balloons flying. Who could ever suspect that a company that sells Readers Digest and TV Guide could ever encounter financial difficulties? Well it didn’t occur to John Wyllie. He had been receiving a $260k deposit every year for life. This year; no check. And no balloons. Next thing you know, you’re selling the jet skis. One thing I can’t blame him for…”why didn’t anyone ever give me a head’s up?” And….it’s gone.
I don’t think Mr Wyllie is in a position to accept PIK payments, or defer debts for a bit more juice on the back end, as is common in a lot of current private credit deals. What CAN happen is: one day the check just didn’t come. No more GI Joe with the Kung Fu Grip.
