Flattening Continues
January 22, 2025
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–Main feature Tuesday was curve flattening, with heavy selling pressure on 2yr notes. In cash, 2s rose in yield just over 1 bp to 4.281% while 10s fell 3.5 to 4.574%. In futures, TUH5 fell 0.25/32s while TYH5 was +6/32s at 108-23+. Last Thursday a large block trade occurred, selling 52k TUH5 vs buying 23k UXYH5. At the time 2/10 was around 37-38 bps, yesterday I marked the spread at 29.3 at futures settle. It appears that front end sales are longs liquidating. Open interest fell 29k in TU and 20k in FV while rising 43.7k in TY.
–There was a new buyer of 30k 0QM5 9712.5c for 5.0, some outright and some covered 9601; settled 4.75 vs an unchanged future settlement of 9600.5 in SFRM6. While there were a few other upside plays in SOFR, flattening was apparent there as well, with the red pack (2nd year) unch’d, while greens (3rd) were +1.625 and blues (4th) were +3.125. Several analysts are echoing Waller and saying several eases are likely this year, but the futures curve isn’t really embracing that view. SFRH5/H6 one-year calendar settled -25 (9576/96010). FFG5/FFG6 settled -38.5 (9567.5/9606). These spreads are indicative of 1 to 1.5 cuts over the year, with odds of the March 19 FOMC specifically at about 25%. (FFG5/J5 spread is -6). Might be a few eases, might be none. Is a hike out of the question? Nope.
–Dollar index fell hard yesterday and is continuing lower this morning. Last at 107.80; on 1/13 it had peaked above 110. A bit of a tailwind for commodities like corn and gold. which have rallied throughout January.
Listened to an interesting clip by Paulo Macro on X
https://x.com/PauloMacro/status/1881743476578255126
One funny line is that he says the west has created the “turducken” of financial disasters. He cites a generational divide, for which he lays blame squarely at the feet of the boomers. “…boomers are the second largest cohort generation-wise in America at 20% of the population, and never in history have we seen a cohort of that size end up with over half the assets in America, while the Millennials who are bigger at 25% of the population hold 6% of assets . And the income levels between those two groups are wildly disparate…” He goes on to claim that tensions arising from this wealth and income disparity are contributing to lottery-like speculation on crypto, etc.
(around 7:20 mark)
