Pause (in the TY rally) that refreshes
February 27, 2025
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–New buyer of 105k TYK5 113.5c: 19 covered 110-20 with 17d. Settled 22 vs 110-28+. On Tuesday, buyer of 100k TYK5 111.5c up to 40, settled 55 yesterday. Cash yield at futures settlement was 4.249%, down 4.7 bps on the day, and now well below the SOFRRATE and EFFR of 4.33%. It becomes more difficult to see domestic TBTF banks sopping up treasury supply at negative carry, though forward rates on the short-term curve are more like 3.75% (for example, SFRZ5 settled 9622.5).
–TYM5 has rallied 6 straight sessions, from 108-265 on 18-Feb to 110-285 yesterday. As the attached chart shows, implied vol has confirmed the move. Open interest had also surged, though we’re now more than halfway through rolls from March to June contracts and OI (aggregate) fell yesterday in TY by 250k. As of this morning TYM5 trades 110-15, a small, refreshing, pullback.
–In my opinion, the market is trading as if a disaster of some sort is brewing, but the vol chart isn’t quite confirming a breakout. All near SOFR calendars have made new lows as forward contracts once again telegraph lower rates. Front contracts are anchored as many Fed officials have repeated they’re in a ‘wait-and-see’ mode with respect to inflation. (PCE prices released Friday). As of yesterday’s settles, it feels like we could start getting some comments from ‘experts’ that the FED IS BEHIND THE CURVE. Cue a somber Jeremy Siegel to plead for emergency cuts. “NVDA didn’t rally after yesterday’s results! PANIC”
–On the SOFR strip the peak contract moved back a slot to SFRZ6 at a price of 9638 or 3.62%. Most-inverted 1-yr calendar is still SFRH5/H6, which fell 3.25 bps to a new recent low -60.75 (9570.25/9631). For the first time this calendar year, the red/green pack spread inverted. It had been as high as 11.5 in mid-January. From yesterday: red pack avg (2nd year) 9635.5 and green pack (3rd year) 9636.25.
–My interpretation is that the market sees sluggish growth ahead, which the Fed will not respond to unless inflation is falling. After running a 7% deficit to GDP last year, the deceleration in gov’t spending necessarily creates an adjustment. Initially there was a sense of euphoria that the private sector would easily plug the hole. That hope seems to be dissipating.
–Mexico and Canada tariffs apparently being instituted on April 2. Europe coming as well.. Washout in bitcoin is continuing. Yen has rallied vs USD since the start of the year. Seeing a small pullback today with $/yen 149.90. Early Jan was 158.50.
–RIP Gene Hackman. Not his best role, but here’s a clip:
Off topic
February 26, 2025
*******************
I happened upon what I thought might be an interesting post:
Recession indicators are everywhere online — even if we’re not actually in one
https://mashable.com/article/recession-indicator-meme-explained
The author is Christianna Silva. The bottom of the piece outlines her credentials:
Christianna Silva is a senior culture reporter covering social platforms and the creator economy, with a focus on the intersection of social media, politics, and the economic systems that govern us. Since joining Mashable in 2021, they have reported extensively on meme creators, content moderation, and the nature of online creation under capitalism.
Before joining Mashable, they worked as an editor at NPR and MTV News, a reporter at Teen Vogue and VICE News, and as a stablehand at a mini-horse farm. You can follow her on Bluesky @christiannaj.bsky.social and Instagram @christianna_j.
I guess it’s one person, but kids these days like to throw around ‘they’ to refer to individuals (for reasons I can’t fathom). The article does include a lot of economic references, but draws no conclusion; it’s just a mish-mash of thoughts. So, I suppose this piece is published under the correct banner. (mashable). Well, maybe there IS a conclusion: “While we aren’t currently in a recession, that doesn’t mean it doesn’t feel like it.” Thanks. I didn’t have to go any further than the title.
I already wasted my time skimming through this piece, and I can only blame myself for what happened next: I was pulled deeper into the pointless abyss by an embedded TikTok link.
https://www.tiktok.com/@c.a.i.t.l.y.n/video/7428619623274122538
Here’s three minutes you won’t get back. Completely appropriate that this video too, is linked with ‘mashable’. Plenty of historical references. No point. From Neal Page in Planes, Trains and Automobiles: “… when you’re telling these little stories, here’s a good idea. Have a point. It makes it so much more interesting for the listener.”
Well, ok, maybe I’m being a bit harsh.
Here is my takeaway from Caitlyn: Dance music, which is oriented around partying, and is, according to her (or they) “dissociative” has gone from underground to mainstream. So that’s a negative indicator. Of something.
Clearly Caitlyn seems bright and educated. Maybe she makes money on TikTok. I don’t know the economics. But it seems as if her talents could perhaps be channeled into something useful.
What’s MY point? If this is what our current educational system is churning out…we’re in trouble!
In: Eurodollar Options
Large treasury option flow appears to favor upside
February 26, 2025
*******************
–SMCI was able to sneak their audited financials to Nasdaq – just under the wire before being delisted. Now it’s all better. At least until we see NVDA’s results this afternoon.
–Yesterday saw vols pop amid some huge TY option trades. May TY calls added 125k on open interest. Flows were weighted to the upside in terms of TY price.
–10y yield closed 4.296, down 9.7 bps on the day. Lowest yield since early December, and now BELOW the Fed Effective yield of 4.33% and SOFR, last set at 4.34%.
By way of comparison, on Nov 8, after the election and one day post-FOMC, the yield was almost exactly where it is now, 4.31%. By 12/6 the low yield was 4.15%. By Dec 19, the day after the FOMC it was 4.56. Hi yield for the move was Jan 14 at 4.79%.
The ‘bond vigilantes’ seem to be throwing in the towel. Or maybe the idea of curtailed gov’t spending = lower growth is gaining traction. Some are pointing to weak consumer confidence from yesterday (98.3 vs 102.5 expected), but it’s way more than that. Feels like a flight into what may or may not be a safe haven.
MONSTER treasury option trades
TYK5 111.5 up to 40 paid 100k. Settled 45 with 37 delta
TYJ5 109/108.5p 1×2 -2 paid 30x60k (sold 108.5p) appears to be rolling up into long TYJ 109p, settles 11/6
TY wk1 110.75/111.25/111.50/112.0 c condor 15k sold at 5. Roll up into higher call spread
TYK 109p/111c rr vs 110-07, 71d -30k call at 13. New position, settled 28 for the call (29/57) with TY settle 110-175
BLOCK
TYK5 108.5p 21 paid 38k 21s new
TYJ5 112c 10k sold 15 16s new
TYK5 112c 15k sold 34 36s appears exit
TYM5 +24k 110-16 (about 10k over delta, net options was about 14k)
SFRZ5 9612.5/9562.5/9512.5p fly 17-17.5 paid 35k. Settled 16.25 ref 9620.5
SFRM5 9625/9687.5cs 3.0 paid 50k. New. Settled 3.0 vs 9570.5
Bitcoin tail-wagging
February 25, 2025
*******************
–Bitcoin has broken out of its three month sideways consolidation to the downside, with the Feb future now at 88200, down nearly 5800. Range had been approx 92.5 to 105. Trapped longs suggest further downside, and NQH being down 89 at 21331 is a potential spillover indication. MSTR is in the red by 6% pre-open at 266 and SMCI which faces a filing deadline today (or could be de-listed by Nasdaq) is down 3.7% at 49.69. NVDA reports tomorrow.
–Yesterday featured slightly lower yields with 10s down 2.3 bps to 4.393%, getting very close to the current SOFRRATE of 4.34% (EFFR is 4.33%). New lows in near 1-yr SOFR calendars. For example, SFRH5/H6 settled -48.25, down 3.5 on the day (9570.25/9618.5). FFJ5/FFJ6 settled -55.0 (9568/9623). So, we’re back to pricing in the idea of 2 or more cuts over the next year, or, equal odds of 0 or 100. Peak contract on the SOFR strip is still SFRU6 at 9621.5; it appears as if reds (2nd year forward) want to press toward 3.5% as the next consolidation area. Interest rate futures are strongly suggesting weaker forward growth.
–WSJ headline (might have been from yesterday):
The U.S. Economy Depends More Than Ever on Rich People
The highest-earning 10% of Americans have increased their spending far beyond inflation. Everyone else hasn’t.
Monday morning consolidation
Feb 24, 2025
**************
–On Friday SPX -1.7% and Nasdaq Comp -2.2%. Led to flight-to-quality buying in treasuries and SOFR. Ten-year yield fell 8.2 bps to 4.416% and on the SOFR strip H6, M6, U6 (the first three reds) were the strongest, all +10.5 (9614.5, 9616.5, 9617.5) with U6 being the peak price contract. SFRU5 atm straddle, the 9593.25^, was 37.25 on Thursday, but on Friday the atm 9600^ settled 41.5. (9600^ on Thursday was 40.0s). From TO this morning (PNT options), “In case you missed, on Friday afternoon SOFR call skew and implied vol exploded for it biggest 1 day move in 6 months. No major news – stocks were lower – there was WILD panic not seen for a while and it caught people off guard.”
–I had expected follow-thru this early morning, but everything has had a small bounce (ESH a bit higher, treasuries lower).
–Important X-post (thanks JVL)
https://x.com/cynicalpublius/status/1893154644789977292?s=46
Here is a quote from Trump’s Exec Order: (citing the post above)
” Economic security is national security. The PRC does not allow United States companies to take over their critical infrastructure, and the United States should not allow the PRC to take over United States critical infrastructure. PRC-affiliated investors are targeting the crown jewels of United States technology, food supplies, farmland, minerals, natural resources, ports, and shipping terminals.”
–BABA has nearly doubled since January, 80 to 143. (Partly capital repatriation?) Financial nationalization may mean that overseas investments aren’t as safe as they used to be. The rapidity of the SVB bank run caught the Fed off guard. Imagine it on a global scale.
The ‘Countertrade’
February 23, 2025 – Weekly comment
*******************
Fascinating story on slashgear.com about Pepsi’s dealings with the old Soviet economy.
Here are a few snippets:
To solve this problem, Pepsi orchestrated what is known as a “countertrade,” essentially allowing the Soviets to pay for Pepsi sodas with a commodity rather than cash. Bartering agreements were a common practice for the USSR in its international business deals in 1971. For example, even the Swedish band ABBA would receive its royalty checks in the form of oil and food goods.
So what did the Russians offer Pepsi in this initial venture? A drink of their own, vodka. As such, Pepsi became the official U.S. importer and distributor of Stolichnaya Vodka, making it the first company to bring authentic Russian vodka stateside since Prohibition.
Later, the deal became larger and more complicated:
Partnering with two Norwegian companies, Pepsi Co. traded for 85 Russian oil tankers worth nearly $2.6 billion —roughly $82 billion in today’s currency. The Norwegians facilitated the deal by scrapping the military vessels and leasing the tankers for their Cola partners. The Soviet Union, in turn, increased its Pepsi bottling locations to 50, and saw an overhaul of its shipyards. As Kendall put it during a company press conference, it was “the largest and most wide-reaching agreement ever signed in the field of consumer goods.”
When the Soviet Union collapsed in December 1991, it took much of [CEO] Kendall’s deal with it.
…Looking back, Kendall described it thus: “We had a multibillion-dollar contract with a nonexisting entity — the Soviet Union.”
Read More: https://www.slashgear.com/1778945/pepsi-navy-fleet-russian-submarines/
Archaic vestiges of another time. But then I saw this post on X:
Boeing is returning to Russia, they need titanium…
The company is going to allow Russian airlines to purchase aircraft and establish supplies of spare parts to the domestic market, and in return receive titanium from Russia.
You might have thought that the title of this piece, Countertrade, has to do with macro themes in the futures markets. And it does; we’ll get to that. But the stories above also have everything to do with the creativity of capitalism and markets: Dealmaking. Credit risk. Supply chain risk.
The over-arching theme reminds me of a speech given by the fiery former CME Chairman Jack Sandner at an annual meeting. “The CME isn’t a ‘trading’ business. It’s bigger. OUR business is “RISK MANAGEMENT”. (At the time the exchange was owned by member firms and members).
When we think ‘risk management’ we tend to think ‘insurance’. And if there’s one thing that has contributed to inflation and forward expectations thereof, it’s retail insurance for homes and cars. Yet, in the macro markets they’ve been giving premium away cheap. In last weekend’s piece I referred to the low level of the MOVE index at 84.57 and noted that VIX was scraping along the lows at 14.77. Kevin Muir (MacroTourist) reported last week that FX vol has been in the dirt. Well, we got a bit of a ‘countertrade’ this week with MOVE up to 91.83 and VIX up to 18.21.
There was an interesting X post Friday by Guilherme Tavares @i3_invest
The ratio between SKEW and Credit Spreads has reached its highest level ever.
In the past, similar high levels haven’t been favorable for equities. A high Skew Index suggests options traders are worried about a potential sharp decline in equity markets (tail risk). A narrow high-yield spread, however, indicates that the bond market isn’t yet pricing in significant credit risk or economic deterioration.
Who is the dumb money here?
I didn’t attempt to recreate this chart or verify the data, but intuitively it makes sense. As a sidebar, I refer to the etf HYG (high-yield). In late July’s yen-carry debacle, HYG had a brief, sharp, sell-off. Currently it’s near the high but has not been making new highs recently with SPX.
From a site called marketchameleon.com “…put open interest [of 5.0 million in HYG] has risen 11.9% in the last 5 days. Compared to its 52-wk avg of 4.5 million contracts, the current put open interest for HYG is higher than usual.” In the interest of FULL DISCLOSURE, I am personally long puts on HYG. This is NOT INVESTMENT advice. I’m just dabbling. But it may be worth noting that the yen is strengthening in similar magnitude to the mid-July move.
I can’t quantify the risks, but there seems to be a lot of dangling uncertainties piling up in the last week or so. The previous week’s repudiation of the high CPI print (TY completely erased the CPI sell-off the next day) was a tell. Then, the FOMC minutes revealed a possible ‘pause’ of balance sheet run-off, potentially removing a weight on treasuries. There’s a bit more press about Norinchukin’s unrealized losses. Friday there was a new corona-virus headline. Are any of these things ‘real’ enough to spark Fed easing? Maybe not, but when taken all together, it’s not a big stretch to say that interest rate futures and options seemed a bit cheap. The market already ignored CPI. So, pay 9571 for FFK5, risking 4 to make 21? (or 15.5 if skip March and go in May) Why not? (Buyer of 110k Thursday afternoon at 9571, settled 9574 on Fri). Load up on SFRU5 9625 calls vs futures? Why not. (Since Thursday, new buyer of over 100k from 10 to 11.5, settled 14.75 vs U5 at 9601.5).
I would mention one other thing that caught my interest. I listened to a Jeffrey Gundlach interview with Tony Robbins from Feb 11. Gundlach mentioned that he is only buying treasuries with coupons at 1% or lower. The reason: he’s concerned about a cram-down. Paraphrasing: “…what if the gov’t says that every bond with a coupon above some hypothetical, call it 1%, is now legally changed to just 1%? That is, a 7% coupon bond turns into 1%. So if you own 7s and wake up tomorrow and the coupon is 1, you’re down about 80% in price.” Now, this might be an extreme. But there are obviously a lot of out-of-the-box ideas being discussed at high levels, in order to avoid the debt-spiral trap. Iron-clad deals occasionally change, as Kendal discovered with the Soviet Union.
https://www.youtube.com/watch?v=rYCiwwSjmFY
Another DoubleLine hypothetical last week questioned whether MSFT debt is ‘safer’ than that of the US gov’t. Related to that, from @CapitalJurassic:
Rumor going around that $MSFT is paying penalties to get out of some data center contracts & power agreements– changing tone drastically on CAPEX growth. Might be another DeepSeek shockwave to the semi supply chain.
Another uncertainty. I suppose the takeaway from all of this is: Question your assumptions. Like the 1960s catchphrase ‘Question Authority’.
No Coke. Pepsi.
Note record level of OI in FV, TY and UXY futures as H/M rolls are in full swing.
| 2/14/2025 | 2/21/2025 | chg | ||
| UST 2Y | 425.5 | 419.0 | -6.5 | wi 418.5 |
| UST 5Y | 432.7 | 425.7 | -7.0 | wi 425.2 |
| UST 10Y | 447.4 | 441.6 | -5.8 | |
| UST 30Y | 469.4 | 466.6 | -2.8 | |
| GERM 2Y | 211.3 | 210.2 | -1.1 | |
| GERM 10Y | 243.1 | 247.0 | 3.9 | |
| JPN 20Y | 201.3 | 205.3 | 4.0 | |
| CHINA 10Y | 165.0 | 175.0 | 10.0 | |
| SOFR H5/H6 | -36.8 | -43.8 | -7.0 | |
| SOFR H6/H7 | -1.0 | -1.0 | 0.0 | |
| SOFR H7/H8 | 5.5 | 7.5 | 2.0 | |
| EUR | 104.93 | 104.60 | -0.33 | |
| CRUDE (CLJ5) | 70.71 | 70.40 | -0.31 | |
| SPX | 6114.63 | 6013.13 | -101.50 | -1.7% |
| VIX | 14.77 | 18.21 | 3.44 | |
| MOVE | 84.67 | 91.83 | 7.16 | |
https://uk.finance.yahoo.com/news/abba-music-soviet-oil-world-143000023.html
In: Eurodollar Options
Someone looking for a blow-up?
February 21, 2025
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–Just considering yesterday’s flows, and this isn’t particularly rigorous analysis, it seems to me that someone is betting on an accelerated easing timetable, and that longer dated treasuries may see rising yields either as a result, or as an independent move.
–Just after the FOMC minutes on Wed, which discussed a pause in the Fed’s balance sheet run-off, there was a large buyer of SFRU5 9625c covered. That buying continued yesterday paying 11.5 vs 9595 with 28d, I believe up to 50k (11.0s ref 9593). In any case, open interest in the calls rose 62k with total OI 152k. Adding to SFRU5 call open interest was a buyer of 50k SFRU5 9650c vs selling SFRZ5 9700c, taking 0.5 credit (had taken 1 credit on Wed afternoon. Yesterday’s settles 8.0 and 8.5, U5 9593 and Z5 9600). Considering these strikes in the context of Fed easing, current EFFR is 4.33 and the SOFR settings have been around that level or just above by a few bps. An ease would put EFFR at 4.08 or 9592, and SFRU5 settled 9593.0. So the 9625 strike is somewhat aggressive; something bad has to happen.
–Much more definitive was a new buyer of 110k FFK5 at 9571.0. Risk 4 to make 21 on an ease in March. The next meeting is May 7, so even if March results in no action, an ease at the May meeting would put FFK5 at 95.864. FFK5 settled 9572.0.
–On the TY side, early new buyer of TYJ5 108/110 risk rev vs TYH5 108-31, paid 8 for the put 50k. There was also a new buyer of ~20k TYJ5 109p cov 109-045, paying 41. Settled 39 vs 109-095 so 1’25 in the straddle. And a buyer of 20k TYK5 106p for 10.
–In conclusion: buying short-end calls and futures, buying TY puts. Invitation to put on 2/10 steepener? Not sure, but at 23.5 bps it’s near lower end of range… NOT ADVICE. DON’T DO THIS. YOU MIGHT LOSE. (There. A disclaimer).
–I would also note RECORD open interest in FV and TY at 7.147m and 5.621m respectively. A lot is driven by basis trades, which Vice-Chair for Supervision Barr touched upon in his comprehensive speech yesterday:
One area that has grown substantially is the Treasury cash-futures basis trade. The basis trade helps provide liquidity and price discovery in normal times, as hedge funds trade with asset managers and other financial institutions to align returns to holding Treasury securities and related futures. But the trade involves high levels of leverage, which can contribute to a rapid unwinding in positions and exacerbate market stress, as we saw in the spring of 2020. In principle, margining practices and participants’ risk-management activities should limit these risks, but individual firms do not account for the spillovers their actions can have on market functioning. These externalities suggest a role for regulation, and the central clearing mandate for Treasury market trading is an important step in supporting the resilience of this market. At the same time, we need to continue to consider how we can support the collection of minimum margin across trading venues and in bilateral trades to avoid loopholes and risks, and continue to monitor banks’ credit risk management practices with these hedge fund counterparties.
–I was taught early on that huge increases in open interest are potential tinder for the next big move. Longs and shorts have staked out their positions, one side is going to be badly wrong and have to scramble to cover. (That was from my technical analysis class given by Ken Shaleen when I was a runner on the floor. With all the complexities and ‘innovations’ in trading, I’m not sure if that idea still has merit, but I’m running with it).
–March treasury options expire today. Below is TY1 (rolling futures) with aggregate OI in blue.
Large SOFR call buys post-minutes
February 20, 2025
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–Early part of the session was quiet, though Housing Starts lower than expected at 1366k (1390 exp and 1515 last). I didn’t expect anything from FOMC minutes, as Powell and other officials had already indicated that inflation concerns would keep the Fed on the sidelines for the near term. However, post-minutes there was a flurry of activity due to unexpected discussions about balance-sheet runoff.
–A lot of SOFR call buying post-FOMC minutes:
0QZ5 9700c vs 9603, 16d. paid 10 to 10.5 for 50k. 10.5s vs 9604.5 in SFRZ6
SFRU5 9625c vs 9589.5, 26d paid 9.5 for 40k and vs 90.5 with 28d 10 for 5k. 10.25s vs 9591.5 in SFRU5
–Below are a couple of snippets from the minutes:
In considering the expected path of the federal funds rate, the manager noted that the modal policy rate path implied by options prices had not changed appreciably on net over the intermeeting period and was broadly consistent with a single quarter-point lowering of the target range for the federal funds rate taking place during 2025. [Market is pretty much in line with Fed officials’ comments]
In their expectations of Federal Reserve balance sheet policy, survey respondents on average saw the process of runoff concluding by mid-2025, slightly later than they had previously expected. [Powell in press conference didn’t seem too concerned about current reserves]
A number of participants also discussed some issues related to the balance sheet. Regarding the composition of secondary-market purchases of Treasury securities that would occur once the process of reducing the size of the Federal Reserve’s holdings of securities had come to an end, many participants expressed the view that it would be appropriate to structure purchases in a way that moved the maturity composition of the SOMA portfolio closer to that of the outstanding stock of Treasury debt while also minimizing the risk of disruptions to the market. Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event.
So there’s the catalyst. Balance sheet adjustment might be ‘paused’, and…if Fed holdings move more in line with outstanding debt, I think that favors a move closer in on the curve.
Below from BBG:
The minutes for the January FOMC meeting were generally in line with expectations. However, a nod to pausing balance sheet runoff during the coming budget negotiations — amid worries about swings in reserve levels — has both equities and Treasuries a touch higher. Given the lack of recent clarity regarding the Fed’s long-term plans for the balance sheet and where exactly “ample reserves” are, traders may be thinking once something stops it will be harder to restart.
–The surprising thing to me is that vol has generally been compressing, even as more plates are added to wobbling spinners already on sticks. That stopped yesterday. In a way, the Fed discussion underscores the Fed’s modus operandi: If the market needs liquidity for any reason, we provide it.
–Though rate futures have been fairly quiet, there ARE markets moving based on Fed and administration ideas: Fannie and Freddie have exploded higher (FNMA and FMCC). Privatization. The largest REITS, Annaly (NLY) and AGNC have had stellar rallies since early January. Tighten MBS spreads? On the other hand, market darling Palantir (PLTR) has dumped around 13% since Tuesday as the Pentagon looks to cut spending.
–Today’s data includes Philly Fed expected 14.3 from 44.3. Jobless Claims 215k (I guess they don’t expect to capture gov’t workers that have been cut, but it’s gotten to the point that DC real estate claims have to be “debunked”
https://www.realtor.com/news/trends/elon-musk-doge-dc-housing-market-crash
–These days every comment has to be prefaced with the disclaimer used by Chris Long (emphasis added):
If data is correct, there are over 12.5m people over the age of 120 receiving Social Security. If you assume $1000 a month (probably too low), that’s $150 billion a year in false payments. Pretty amazing stuff if it’s real.
Rates Quiescent
February 19, 2025
*******************
–Yields rose yesterday with tens up 6.8 bps to 4.542%. Going into Friday’s March Treasury option expiration, I had thought TYH5 would gravitate to the 109 strike, but yesterday’s settle was a bit lower at 108-27.
–Vol was again hit. Example: On Friday SFRH6 9600^ was 74.25. Yesterday, 72.0. It wasn’t all that long ago when the first quarterly SOFR straddle trading around 100 bps was much closer than it is now.
Currently:
SFRU6 9600^ is 96.5 ref 9603.5. 570 dte
A month ago, Jan 17:
SFRM6 9600^ 101.0 ref 9600.5. 509 dte
On Dec 19
SFRM6 9600^ 103.5 ref 9599.5 540 dte
On Nov 18
SFRH6 9612.5^ 100.75 ref 9616.5 480 dte
And Oct 18
SFRZ5 9662.5^ 96.5 ref 9662.5 418 dte
What’s the point? Pre-election premium was pumped. Now it’s not. Today we have the FOMC minutes, but since the last meeting many officials including Powell have said the Fed’s in no hurry to adjust rates. The SOFR strip, with prices clustered just above and below 4% (9600) reflects that, as does option premium.
–Housing starts also out today, expected 1390k.
–Gold making a new all-time high this morning, with spot $2944. In the beginning of this year it was 2600.
–One trade of note yesterday, that I simply highlight because it’s being accumulated over time in 15k clips, and is a somewhat interesting disaster curve trade:
Buyer 15k SFRZ5 9700c vs 0QZ5 9750c for 3.5. Settles: 8.0 and 4.75 (3.25). Adding, long ~60k, most bot better, call it 1.0 to 3.5. Both options expire 12/12/25. Chart is both contracts (top panel) and sprd in lower. Trade works best in disaster: Z5 above 9700 (under 3%) on aggressive cuts and hopefully Z5/Z6 spread stays around 0 (or at least above -45).
Waller HODL
February 18. 2025
*******************
–From Waller’s speech yesterday:
After two good months of inflation data for November and December, January once again disappointed and showed that progress on inflation remains uneven. I continue to believe that the current setting of monetary policy is restricting economic activity somewhat and putting downward pressure on inflation. If this winter-time lull in progress is temporary, as it was last year, then further policy easing will be appropriate. But until that is clear, I favor holding the policy rate steady.
https://www.federalreserve.gov/newsevents/speech/waller20250217a.htm
–Previously he had opined that further rate cuts were warranted; now wants to wait and see as economy is firm and inflation is bouncy. Waller also briefly touches on the divergence between rate cuts and the corresponding surge in 10y yields, but merely notes that divergences have occurred before, and offers no explanation for the current situation, apart from saying. “It’s NOT OUR FAULT.” I have no idea why that section was even included in the speech:
“This example is just to illustrate that the 10-year Treasury yield may not respond to the policy rate as expected because of a variety of factors that are beyond the control of the FOMC.”
By way of contrast, the Trump admin does NOT think that the 10y yield is beyond its control.
–Friday featured lower yields, as midweek inflation data were ignored. Retail Sales were weaker than expected, supporting treasuries. I marked ten down 5 bps at 4.474%. On the SOFR strip reds and greens (2nd and 3rd years forward) were strongest, up 7.5. Peak contract is SFRU6 at 9608.5, right around 3.9% one and a half years from now. Seeing a bit of divergence currently between bitcoin and nasdaq, as NQH5 is poised to make new ATH, (22450 on 12/16/24 and now 22283), while XBT is middle to lower end of the past 3-month’s range 91200 to 107000 (current 95670). Of course, that divergence could close at any minute, but bitcoin appears to be trading a bit long and heavy at the moment.
–March treasury options expire Friday. TYH5 currently pinning the 109 strike.
