BIG flattener
February 6, 2025
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–Back in the Clinton presidency, there was angst about budget deficits. From Bob Woodward’s ‘The Agenda’:
“Clinton recognized that it was the exact argument that Greenspan had made to him the previous month. Deficit reduction could mean lower long-term interest rates.
… Clinton’s face turned red with anger and disbelief. “You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fvcking bond traders?”
–There was a tacit, or maybe even overt deal. Get the budget under control and the Fed will cut rates.
–From a BBG summary today: Bessent says the Trump admin’s focus is on bringing down 10y yields, not FFs. Bessent believes expanding energy supply will lower inflation and a lower deficit will reduce 10y yields.
–So there you have it, a drop in the 10y yield yesterday of 9.3 bps to 4.418%. Sure we had a low JOLTs number the other day and yesterday ISM Services were a bit lower than expected. But I believe that Musk’s efforts are going to change incentives throughout government, and help reduce the trajectory of spending. Does that justify a ten year yield that’s rapidly closing in on the Fed Effective rate of 4.33%. Maybe not….but maybe. I am sure Powell and Bessent came to a tacit understanding on the issues.
–The outcome is a much flatter curve. Yesterday 2/10 fell 6.4 bps to a new low for 2025, 23.7 bps. On the SOFR curve, all near calendars collapsed to new recent lows. SFRH5/H6 fell 4.5 to -41 (9574.5/9616.5). Just looking at June contracts, M5 +1 at 9590. M6 +5.5, 9617.5. M7 +9.0, 9616.5. M8 +10. 9610.5. A couple of chunky call spread buyers…again, slightly further back on the SOFR curve:
+23k 0QU5 9712.5/9812.5cs 6.5. (settled 7.0 ref 9618.0 in SFRU6)
+25k 2QH5 9650/9700cs covered 9614, 3.25 paid. (settled 4.0 ref 9617.5 in SFRH7)
–Yesterday, a buyer of 100k TYH 109p, starting early at 26 and ending at 18 at the market rallied. Final settle 20 ref 109-24 with 32 delta. Not saying it’s the same guy, but on Jan 14 there was a buyer of 100k TYH 108.5c 28 covered average 107-10, 30d. On Jan 24 a buyer of 50k TYH 108.5c 41 covered 108-11. Yesterday, TYH5 108.5c settled 1’28 (80 delta). TYH 109p have a delta of 30. Protective buys in front of NFP tomorrow?
–Today brings Nonfarm Productivity (1.2% expected) and Jobless Claims expected 213k.
