Bessent in the Driver’s Seat?
March 2, 2025 – Weekly Comment
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Yields at new lows for the year. On the week, 2s dropped 19 bps and are now just under 4%. 5s down almost 23 at 4.026%, 10s down 19 at 4.227%, now 10 bps under the Fed Effective rate of 4.33%. The thirty-year fell 15.3 bps to 4.513%.
A lot of people are asking what’s driving it. Standard broker fallback: “More buyers than sellers.” This one with a twist. There’s a huge buyer inhaling May TY calls. His name is Bessent. I am joking about Bessent, though he had clearly articulated that the administration wants long rates down. On Tuesday there was a new buyer of 100k TYK5 111.5c up to 0’40 (settled 0’62 on Friday vs 111-03. On Wednesday, a new buyer of over 100k TYK5 113.5c for 0’19 covered 110-20 with 17d. On Friday these strikes settled 0’62 and 0’25 with TYM5 111-03. Implied vol ended the week at a new high for this calendar year. MOVE at 104.46, having been sub-84 a week and a half ago on Feb 19. (Spike high in MOVE pre-election was 136). May treasury options expire 25-April, after quarter-end and after April tax day, but before May 7 FOMC. Quarter-end may be interesting to see if repo spikes (might provide clues to ampleness of reserves). It’s also the end of Japan’s fiscal year.
Support for treasuries can be pegged to several factors. Job cuts in government and budget cutting in general. Steady inflation data. Slowing economy. Vulnerable equities. Though monthly PCE prices were +0.3 for headline and core, yoy Core at 2.6 matched the low of the cycle from last June.
The chart above is 5y US yield. Since Sept 2022, the range is ~ 150 bps, 3.4 to 4.95. Last at 4.02. (around the mid-pt).
On 9/21/22 FF hiked to 3.125 (range 3.0-3.25). Peaked 5.375 July’23. Now 4.375. (~ the mid-pt)
YOY CPI peaked 9.1 June’22. Last 3.0. Low 2.4, expected 3.0 for February (released 3/12).
Post SVB failure, the 5y plunged to 3.3% in May 2023. FF were 4.875%, just about equal with yoy CPI at the time. That is, the 5y yield was inverted to FF & CPI by 150 bps! One could easily make the case that the Fed could cut 25 or 50 by Q4 (to 4.125 or 3.875), which would still likely be well above CPI of 2.5 to 3.2, and 5y yield could hit 3% in a panic situation. Where’s the panic? Perhaps from falling asset prices as the world rebalances away from the US.
I’m not going to get into the Trump/Vance/Zelensky meeting. Unsurprisingly, strong feelings on both sides. But to me, the outcome is unambiguously negative for the eurozone.
Chart above is EUR/JPY. I can’t help but feel that a large downside move is near. Then I wonder if perhaps Europe makes a U-turn. After all, it will be the children of Europe on the front lines. Perhaps huge investments in defense/tech are around the corner. Could Europe’s manufacturing base become rejuvenated?
I’m reminded of a speech made by Sec’y of the Navy Carlos Del Toro on 14-Dec 2023. (As far as I know, first highlighted by Luke Gromen – Forest for the Trees). Excerpt below:
This creates substantial operational and economic risks for the American economy in the event of a crisis or conflict.
Over the past three decades, while China’s comprehensive maritime power has skyrocketed, ours has dramatically declined.
History demonstrates a clear pattern: no great naval power has ever existed without also being a dominant commercial maritime power, encompassing both shipbuilding and global shipping.
It is imperative that we take decisive action to reclaim America’s position as a leading maritime power.
I had read that and thought, hmm, maybe it’s appropriate to have a little exposure to this theme. So I did a little (and I mean a little) bit of research and decided to buy the ADR on Kongsberg Gruppen (KBGGY), a defense company in Norway (missile controls for maritime and air traffic surveillance).
I’m not saying Del Toro’s speech caused this run. After all, gold priced in EUR looks quite similar with a decided acceleration in trend since the start of 2024.
What I do believe is that the Trump administration is causing hard shifts in incentives the world over. Perhaps positive in the longer run for the US, but in the short run, fiscal dominance is receding. For years, the US avoided recession, due in large measure to US deficit spending.
The latest Atlanta Fed GDP Now forecast for Q1 crashed to -1.5%. After recent data, “…the nowcast of the contribution of net exports to first-quarter real GDP growth fell from -0.41 percentage points to -3.70 percentage points while the nowcast of first-quarter real personal consumption expenditures growth fell from 2.3 percent to 1.3 percent.” To those that believe deteriorating economic data will sidetrack Trump’s agenda, my thought is that whenever he’s attacked, Trump’s M.O. is to double down.
Other Thoughts / Trades
On the SOFR strip, over the last week the strongest contracts were June’26 to June’28, +27 to +28 bps. The rally in deferred contracts suggests a slowing economy, with little expectation of forced easing by the Fed (as of yet). Peak contract is SFRU6 at 9644.5, up 27 from the previous Friday 9617.5. This contract is approaching 3.5%. In fact, halfway back from the September high of 9725.5 to Jan 10 low of 9581.5 is 9652.0. Will likely chop around this area going into Friday’s employment data.
Government has been adding 20-25% of jobs over the last couple of years. On Friday, NFP expected 160k from 143k. Unemployment rate still expected at 4.0% same as last month.
| 2/21/2025 | 2/28/2025 | chg | ||
| UST 2Y | 418.5 | 399.5 | -19.0 | |
| UST 5Y | 425.2 | 402.6 | -22.6 | |
| UST 10Y | 441.6 | 422.9 | -18.7 | |
| UST 30Y | 466.6 | 451.3 | -15.3 | |
| GERM 2Y | 210.2 | 202.5 | -7.7 | |
| GERM 10Y | 247.0 | 240.6 | -6.4 | |
| JPN 20Y | 205.3 | 202.7 | -2.6 | |
| CHINA 10Y | 175.0 | 177.8 | 2.8 | |
| SOFR M5/M6 | -29.5 | -48.0 | -18.5 | |
| SOFR M6/M7 | 3.0 | 2.0 | -1.0 | |
| SOFR M7/M8 | 7.5 | 8.5 | 1.0 | |
| EUR | 104.60 | 103.78 | -0.82 | |
| CRUDE (CLJ5) | 70.40 | 69.76 | -0.64 | |
| SPX | 6013.13 | 5954.50 | -58.63 | -1.0% |
| VIX | 18.21 | 19.63 | 1.42 | |
| MOVE | 91.83 | 104.46 | 12.63 | |
