Rates higher…
January 8, 2025
*****************
…is it due to a whiff of inflation, or borrowing to buy Greenland?
–Data stronger than expected Tuesday with ISM Services 54.1 vs expected 53.5. Prices Paid were 64.4, highest in the past two years. JOLTS continued to rebound, up to 8098k. Treasuries were inspired to make new lows (price). High 30y yield 4.92%, new high since 5.115% in October 2023. Tens fell just short of 4.70%; high in April of last year was 4.706% according to BBG. The high in Oct 2023 was 4.992. At that time, the front TY contract was in 105 handle. 10/19/23 low of 105-10+. (There has been a good size buyer, 100k, TYH 106 puts recently).
–Key reversal by NVDA. New all-time high in the morning 153.13. Outside range day on solid volume; large range ($13) and closed on the low, 140.14. NVDA is the only one out of Mag7 to have posted an all-time-high (META is close). Last domino?
–Today’s news includes ADP expected 139k, Jobless Claims 215k. 30 year auction. Later in the day FOMC minutes and Consumer Credit.
More than 0DTE options, more than unlimited leveraged ETFs, and more than the GameStop saga, Fartcoin has become the financial asset manifestation of exactly what our market has become: Arkham Asylum, bursting at the seams with lunatics laughing like unhinged hyenas and unproductive assets chased by unsophisticated investors who, through the miracle of legalized sports betting, Robinhood, and “working from home”, have developed into full-on gambling addicts.
https://quoththeraven.substack.com/p/behold-the-era-of-fartcoins-majesty
Price action in rate futures remains bearish
January 7, 2025
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–30y bond exceeded last year’s high yield, printing 4.86% yesterday. marked at 4.835% at futures close (USH5 113-04s). In tens there was an early buyer of 50k TYH5 106p for 14, adding. Settled 15 vs 108-17. Open interest now 108k. The 106 strike is approximately 5% yield. Today tens are auctioned, followed by 30s tomorrow. New high in 2/10 at 34.2. On the SOFR strip, SFRZ5 was unch’d at 9602 and it’s now the peak contract price (along with H6 at 9602). From there, net changes were successively lower: Z6 -3.0 at 9597.5, Z7 -5.0 at 9592.0, Z8 -6.0 at 9586.5. Price action in interest rate contracts remains bearish.
–Today’s news includes Trade balance, JOLTS expected 7745k and ISM Services, expected 53.5 from 52.1.
Super Highways
January 5, 2025 – Weekly Comment
*************************************
First, a couple of Fed snippets which highlight a shift back to favoring the inflation mandate (as if the increased inflation dots in the last SEP were too subtle of a hint):
From Tom Barkin’s Fed speech on Friday, Jan 3:
- My baseline outlook is good. How economic policy uncertainty resolves will matter. But, with what we know today, I expect more upside than downside in terms of growth. I see more risk on the inflation side.
Basically, consumer strong but pickier. Jobs balanced, not as much firing and not as much hiring. Productivity gains.
… in my district [Richmond], there’s particular concern about the path forward for the federal workforce.
Second:
From a conference Saturday, both Kugler & Daly “stress inflation fight has not yet been won” (BBG)
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Kevin Muir, The MacroTourist, wrote in his latest post that some funds are changing their benchmarks rather than being shackled to performance (and portfolio percentages) of Mag7.
Behind the scenes, many compliance departments and other soberly inclined portfolio managers are questioning the wisdom of being benchmarked to an index that is so exposed to a single group of stocks. Many are choosing to change to a more diversified index.
https://themacrotourist.com/
The implication, depending on how large of a trend this becomes, is that less new money will be funneled into Mag7 and more into the broader market. Currently Mag7 is around 36% of SPX, vs 27% in 2020. (mkt cap Mag7: AAPL, AMZN, GOOGL, META, MSFT, NVDA, TSLA is $17.9T). Some might argue that compliance departments are also becoming heavily “overweight” with respect to the financial industry…
This is from a recent BBG story:
“The world’s 500 richest people got vastly richer in 2024, with Elon Musk, Mark Zuckerberg and Jensen Huang leading the group of billionaires to a new milestone: A combined $10 trillion net worth. [I calculated those three at ~$760 billion]
As a comparison, St Louis Fed has GDP as of Q3 at $29.4T.
What follows is sort of a planes, trains and automobiles comparison vs the information highway. DJT, no, not Donald J Trump but rather the Dow Jones Transports, surged on the election of DJT. From 16252 on Oct 31 to 17618 on Nov 29, a jump of 8.4%. However, as of Dec 31 it was all gone. In fact, on 12/29/23 DJT was 15899. On 12/31/24 it was 15896. No gain over the past year. Nada.
On 12/29/23 META was 354. On 12/31/24 it was 585, a gain of 65%. The market cap rose from about $925b to 1.528T, a rise of $603 billion. The market cap of all companies in DJT is $768b. Those 20 companies combined are worth half as much as Meta. According to slightly dated data on BBG, the DJT companies employ about 1.65 million people. META has 72k employees.
Now, here’s a snippet from Scott Galloway’s 2025 Predictions:
| The AI Company of 2025: Meta |
| No business is better positioned to register progress in AI than Meta. Nine out of 10 internet users (excluding China) are active on Meta platforms. The company has access to more unique human language data, i.e. raw training data, than Google Search, Reddit, Wikipedia, and X combined. In terms of compute, Meta has purchased more Nvidia Hopper GPUs (advanced AI hardware) than any U.S. company other than Microsoft, giving it unmatched AI training and deployment capacity. |
So, looking at things through the lens of Galloway, a technology expert, it’s about AI and tech stocks compared to each other, not to the broader market. Ignoring the stardust of AI, an X post by Daniel T Niles regarding META says in 2025, there is no election and no Olympics to provide a growth boost.
CONFLICT CONFESSION: I am personally short META calls vs long other tech company calls. Very small position.
The point is that 2025 may be the year of rebalancing. Out of tech and into ‘old economy’. Out of growth spurred by Federal Gov’t Deficits and into the private sector. Out of guns into butter. I have no idea whether the net shift will be up or down with respect to US equity markets, but at the margin, the Fed’s re-balance toward inflation rather than employment probably favors the latter.
OTHER TRADE THOUGHTS
My opinion is that the Fed’s 50 bp ease in September was partially sparked by volatility related to yen-carry on August 5. JPY is close to its level of early July just above 161, currently at 157.26. Low on Aug 5 was 141.70. Ten-yr JGB is near last year’s high, set in July, of 1.094% (current 1.085). Japan CPI is 2.9%. BOJ needs to hike. (another rebalance?)
FV to US vol ratio is near DV01 ratio. Last time I recall this happening was when inflation was picking up but the Fed was holding pat, i.e. the long end was leading both in terms of higher yield and higher relative vol. This time it’s more of a deficit scare. (DV01 ratio $124.70 USH v $42.00 FVH or 2.97. Vol ratio 11.85 to 4.14 or 2.86. Usually the vol ratio is more like 75% of DV01 ratio).
Gold SOFR contracts (5th year forward) appear too high in price (low in yield) relative to treasuries. My opinion is that the red/gold pack spread in SOFR is lagging 2/10 treasury spread. From mid-August to Sept 25, rolling red/gold SOFR spread rallied from 7 bps to 40.75 (up 33.75). Over the same period 2/10 rallied from -20 to +22, 42 bps. Since Nov 25, 2/10 from 0 to +31.5 (new high). Red/gold from -9 to +15 or up 24. Below is first gold to 10y yield, now at a spread of 50bps (nr lows).
Perhaps it’s the adjustment of reds lower (in price) without a corresponding move higher in the 2y yield. For example, on September 11, the yield on SFRH6 vs 2y was 84.5 bps (2s were 3.64% and SFRH6 was 9720.5 or 2.795%). SFRZ5 was essentially the same as SFRH6 so roll doesn’t account for more than a couple of bps. Currently 2s are 4.28% and SFRH6 is 9602.5 or 3.975%, a spread of 30.5 bps.
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Auctions of 3s, 10s and 30s ($58b, 39b and 22b) are Monday, Tuesday, Wednesday, moved forward due to the Day of Mourning for President Carter on Thursday. JOLTS on Tuesday. FOMC minutes Wednesday. Payrolls on Friday expected 160k, with Rate unch’d at 4.2%
Other upcoming events:
From the BLS:
Benchmark Release Date
The Bureau of Labor Statistics (BLS) will publish the annual benchmark revision to establishment survey employment data with the February 7, 2025 release of the January 2025 Employment Situation.
https://www.bls.gov/ces/publications/news-release-schedule.htm#:~:text=Benchmark%20Release%20Date,the%20January%202025%20Employment%20Situation.
From Yellen’s recent December 27, 2024 letter to Congress:
Treasury currently expects to reach the new limit between January 14 and January 23, at which time it will be necessary for Treasury to start taking extraordinary measures.
| 12/27/2024 | 1/3/2025 | chg | ||
| UST 2Y | 432.4 | 427.9 | -4.5 | |
| UST 5Y | 445.6 | 441.2 | -4.4 | |
| UST 10Y | 461.9 | 459.8 | -2.1 | wi 459.9 |
| UST 30Y | 481.0 | 481.5 | 0.5 | wi 481.9 |
| GERM 2Y | 210.0 | 216.1 | 6.1 | |
| GERM 10Y | 239.6 | 242.5 | 2.9 | |
| JPN 20Y | 189.5 | 188.2 | -1.3 | |
| CHINA 10Y | 170.1 | 162.1 | -8.0 | |
| SOFR H5/H6 | -17.5 | -21.5 | -4.0 | |
| SOFR H6/H7 | 4.0 | 3.0 | -1.0 | |
| SOFR H7/H8 | 3.5 | 3.5 | 0.0 | |
| EUR | 104.25 | 103.09 | -1.16 | |
| CRUDE (CLH5) | 70.18 | 73.21 | 3.03 | |
| SPX | 5970.84 | 5942.47 | -28.37 | -0.5% |
| VIX | 15.95 | 16.13 | 0.18 | |
| MOVE | 95.20 | 96.67 | 1.47 | |
Bond supply…then payrolls
January 3, 2025
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–Treasury auctions of 3, 10, 30y moved to Monday, Tuesday, Wednesday due to memorial day for President Carter on Thursday. Payrolls on Friday.
–Yields were lower yesterday morning to start the year but ended around unch’d with tens 4.573%. SOFR contracts -1 to +1.5 out to golds (5th yr). There was fairly heavy block activity in TY puts, looked to be rolls from Feb puts into long TYH 106p from TYG 108.5 and 107.5p. In any case, DV01 currently on TYH is $64.70 so against a settle of 108-26 vs 10y cash yield of 4.573, let’s call the 106 strike something like 44 bps away ~5%.
–Feb options peak open interest is 108.5p (33s) and 108p (21s) at 95k and 98k, with former down 9k and latter +21k. TYH5 106p settled 14 and open interest rose 44k to 60k (now the put strike with peak OI). Also a new buyer of 10k TY wk2 108p which settled 9.
–BBG reports after having defended 7.30 in CNY for a couple of weeks, China let it go, trading last at 7.3187. There’s also this snippet from Reuters:
RTRS BEIJING, Jan 3 (Reuters) – China will sharply increase funding from ultra-long treasury bonds in 2025 to spur business investment and consumer-boosting initiatives, a state planner official said on Friday, as Beijing cranks up fiscal stimulus to revitalise the faltering economy.
–SHCOMP lower again this morning as the year begins with a further unwind of the late Sept China stimulus package. I don’t know that Trump’s tariff plans are likely to be inflationary given stagnation and a weaker currency in China.
2/10 close 2024 at high of year, +32.7
January 2, 2025
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–Thin conditions Tuesday to end the year. Yields edged a bit higher. I marked tens at 4.577%, up 3.4 bps on the day and up 70 bps on the year.
–Buyer 7.5k SFRZ5 9600/9650/9700c fly for 8.25. Settled 7.75 ref 9605.5. Also SFRU5 9650/9750cs bought 24k, vs sold 12k SFRZ5 9550p at 0.5 (cs settled 9.75, put at 16.5)
–2/10 treasury spread settled at the year’s high of 32.7. On the chart below, it’s the white line. I loosely watch red/gold pack spread as a proxy (in red on chart). The scales on the chart are not the same, but red/gold is lagging here. This is NOT a specific trade recommendation, just an observation. I will probably write up a trade rec today when I can check live option pricing.
From end of Nov, 2/10 went from -18 to +32, a jump of 50. Over same time frame, red/gold from -9.75 to +17.75; of course there was a contract roll, but the lag is evident using specific contracts. In looking at the move from early July to Sept 13, (just before the FOMC), 2/10 rose from -35 to +7 or 42 bps. Red/gold from -15 to +31 or 46 bps.
–News today includes Jobless Claims, expected 221k. I’m guessing they’ll be up to 250k by end of Q1. NOTE: next week we have 3/10/30 year auctions. Thursday is a half day to honor President Carter. BBG still shows auction time at 1pm for the 30y.
Bring on 2025
December 31, 2024
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–Yields eased yesterday, with tens down 7.6 bps to 4.543%. Current is 4.52 (pre-open). Year’s range 3.62 to 4.71; the low coincided with the Fed’s initial 50 bp ease in mid-Sept. Tens are currently about 20 bps above the Fed Effective rate.
–BBG article this morning ‘Treasury’s $50 trillion Deluge Will Test Strained Dealer ‘Pipes’
“Issuance has gone up almost threefold in the last 10 years and the anticipation is for it to close to double to $50 trillion outstanding in the next 10 years, whereas dealer balance sheets haven’t grown at that magnitude,” said Casey Spezzano, head of US customer sales and trading at primary markets dealer NatWest Markets and chair of the Treasury Market Practices Group, the government-debt watchdog sponsored by the New York Fed. “You’re trying to put more Treasuries through the same pipes, but those pipes aren’t getting any bigger.”
–Unemployment is Jan 10. Half day now on January 9, in honor of Jimmy Carter. ISM Mfg is this Friday.
PRNewswire/ — CME Group, the world’s leading derivatives marketplace, has announced that it will honor the passing of former President Jimmy Carter by implementing an early close for agricultural, equity and interest rate markets on the National Day of Mourning on Thursday, January 9, 2025.
U.S. equity markets will be open until 8:30 a.m. CT on January 9. All U.S. equity options expiring on January 9 will be moved to expire on Jan 8.
Interest rates and agricultural markets will close at 12:15 p.m. CT on Thursday, January 9.
We can absorb delinquencies on credit cards. CRE?
December 30, 2024
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–Big trade Friday as stocks slid: New buyer of 50k SFRM5 9612.5/9662.5cs vs 9556.25p for 3.0 to 3.5 covered 9592. 9612.5c 13.0s OI +43.5k. 9662.5c 6.0s OI +54k. M5 9556.25p 4.0s, OI +42k. Spread settle 3.0 ref 9592.0 settle. Stocks are slightly easier this morning and SFRM5 is 9593.5.
—Curve steepened Friday with 2’s down slightly in yield, and 10’s up 4.2 bps to 4.619%. 2/10 spread ended at the high of the year 29.5 bps. Similarly, red/gold pack spread in SOFR at a new recent high of 14.0. Red pack ended -1.375 at 9597.125 and gold pack -5.375 at 9583.125. All SOFR contracts settled under 9600 or 4%. Peak contracts now SFRZ5 and H6 at 9599.
–Financial Times leads with an article ‘US credit card defaults jump to highest level since 2010’. Sounds ominous, but the default rate according to St Louis Fed is 3.23%. The interest rate charged on credit cards, all accounts, is 21.76%. Therefore, the spread is 18.5%. In 2010, the high interest rate was 14.25, so call it a spread of 11%. In other words, it doesn’t seem like a particularly big deal….for now anyways. If there’s a story here, it seems to me that whether it’s credit cards, mortgages, insurance rates, etc. the spreads seem to be extraordinarily high.
Below are St Louis Fed graphs of delinquency rates and credit card interest rates.
Merry New Year
December 29, 2024
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Chart below is the SOFR futures curve. The white dots are from late Friday. The red dots are from one month ago. The obvious change is the shift to lower prices (higher yields). On November 27, the peak contract was SFRU7 at 9637. On Friday SFRU7 settled 9593. The high of this contract on Sept 10 was 9709. As we all know, there’s been a wrenching sell-off in rate futures since the September 18 FOMC.
There are a few other things to notice. First, not a single SOFR contract now is above 9600. That is, all forward rates are above 4%. Secondly, and perhaps more subtle, is that the peak contract on the strip has moved forward in time as back contracts have shifted lower with the steepening curve. The peak contracts as of Friday’s settle were SFRZ5 and SFRH6 at 9599. That means that every calendar spread from March’26 forward is now positive.
I’ve marked the current lowest quarterly contract, SFRH5 at 9581.5 and the peak at 9599, a spread of just -17.5 over a shortened timeframe of just nine months. The implication, if the trend continues, is reduced liquidity going forward. Higher forward rates, stronger USD, cracks in equities… the last signal will be widening credit spreads.
Before the Sept 18 FOMC, the 2nd to 6th one-year SOFR calendar was -130 bps. Of course, since then we’ve had 100 bps of ease, so perhaps the SFRM5/M6 spread at -5.5 (9592/9597.5) makes sense; the front easing has substantially occurred. The issue, as I have repeated, is that asset prices are dependent on lower forward rates discounting future cash flows.
In corroboration with the steepening SOFR curve, 2/10 made a new high for the year of 29.5 bps (4.324%/ 4.619%). The high in 2021 was 158 bps. The low on March 8, 2023 was -108.7. The halfway point is 24 bps which has now been breached. The 0.618 retrace is 55 bps, which is likely the next target. It’s worth noting that while cash tens did NOT make a new high for the year (the April high was 4.706%), thirties did, taking out April’s 4.813% by a bp or so (marked at 4.82 on BBG).
OTHER THOUGHTS/ TRADES
As stocks slid Friday from a ridiculous early week surge, there was a new buyer of 50k SFRM5 9612.5/9662.5cs vs 9556.25p for 3.0 to 3.5 covered 9592. 9612.5c 13.0s OI +43.5k. 9662.5c 6.0s OI +54k. M5 9556.25p 4.0s, OI +42k. Spread settle 3.0 ref 9592.0 settle.
June SOFR options expire 13-June. The FOMC is the 18th. Meetings prior to June are 29-Jan, 19-March, 7-May.
Happy New Year to all! With inflation threatening again, may we all enjoy good health and the prosperity to afford the little luxuries
| 12/20/2024 | 12/27/2024 | chg | ||
| UST 2Y | 431.4 | 432.4 | 1.0 | |
| UST 5Y | 438.0 | 445.6 | 7.6 | |
| UST 10Y | 452.6 | 461.9 | 9.3 | |
| UST 30Y | 471.8 | 481.0 | 9.2 | |
| GERM 2Y | 202.7 | 210.0 | 7.3 | |
| GERM 10Y | 228.5 | 239.6 | 11.1 | |
| JPN 20Y | 185.5 | 189.5 | 4.0 | |
| CHINA 10Y | 171.8 | 170.1 | -1.7 | |
| SOFR H5/H6 | -20.5 | -17.5 | 3.0 | |
| SOFR H6/H7 | -1.0 | 4.0 | 5.0 | |
| SOFR H7/H8 | 1.0 | 3.5 | 2.5 | |
| EUR | 104.30 | 104.25 | -0.05 | |
| CRUDE (CLG5) | 69.46 | 70.60 | 1.14 | |
| SPX | 5930.85 | 5970.84 | 39.99 | 0.7% |
| VIX | 18.36 | 15.95 | -2.41 | |
| MOVE | 90.41 | 95.20 | 4.79 | |
Tech spending race
December 28, 2024
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Just one of those charts from the dotcom bubble. There are a lot like this. This one went from 10 in late 1998 to 110 in Q3 2000. And then, poof.
The fortunes being spent today on data centers for AI are jaw-dropping, but tech leaders are actually worrying about spending too little. ‘When you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here,’ Google CEO Sundar Pichai told analysts… Tech CEOs view their investments in data centers as all-purpose bets on the future. If the AI bubble pops, a data center can easily be put to work fueling whatever the next big wave in tech turns out to be.”
I clipped the above from Credit Bubble Bulletin, but the source Axios piece is linked at bottom. The Axios piece has a chart which shows aggregate Capex spending for MSFT, META, GOOGL and AMZN having gone from around $70b in 2019 to $218b in 2024.
When I read the Sundar Pichai quote, it immediately made me think of the dotcom bubble and fiber optic cable. Fiber optic was the backbone of the internet, and the lead company was Corning (GLW), stock pictured above. Of course, to check my memory, I searched for ‘Corning optic fiber’ and was rewarded with this spectacular piece by Kevin Maney from March of this year.
https://kevinmaney.substack.com/p/is-nvidia-remaking-the-movie-corning
He compares Corning with NVDA. It’s not the direct comparison to NVDA which I find interesting, it’s the general theme of a spending race brought on by transformational technology. The winners likely know there will be a shakeout at some point, but they will be left standing (in the rubble).
From the article: “For a while, the strategy looked brilliant. Demand from the Enrons and WorldComs and Level 3s went crazy. They had blank checks from investors to spend, and so they did.”…then…” What once looked like precious and scarce fiber optic bandwidth turned into a glut.”
The promise of AI is efficiency, and the replacement of many professional jobs. Like many transformations, there will be winners and losers.
Here’s a clip quoting Wendell Weeks, who was at the core of Corning’s fiber optic strategy and is now CEO (emphasis added).
“Wall Street had given (these telecom companies) around over half a trillion dollars, and so when people show up with hundreds of millions of dollars to buy your product, you tend to believe them,” Wendell said. “Our big lesson learned was, for one, it’s not enough just to be the best at what you do. You also have to understand your customers’ business model and your customers’ customers’ business model. We were risking more than money. We were risking significant dislocation of people’s lives.
The problem is that dislocations can’t be avoided. Perhaps in recent history they’ve been pushed a bit further forward. The volatility in stocks post-FOMC is a reminder to manage downside risks.
There’s a sobering line in the Big Short by Ben Rickert, in response to Charlie and Jamie celebrating their bet against CMO’s.
“If we’re right, people lose homes. People lose jobs. People lose retirement savings, people lose pensions. You know what I hate about f-cking banking? It reduces people to numbers. Here’s a number – every 1% unemployment goes up, 40,000 people die, did you know that?”
The great part about the Corning (and American) story is this: the company didn’t go out of business. It continued to innovate. Weeks: “We’re never about the products that we make because the products we make will always change. What won’t change is the core of the company being about values and innovation. …We took the opportunity to decide what type of company we were going to be for the next decade. A lot of companies, when they get in that spot, change fundamentally what they are. We instead really embraced the core of what we do, which is to create and make keystone components and to grow through innovation, and acknowledge at the same time there are inevitable downsides.”
The AI boom has created a lot of tech investment geniuses. The other part to remember is that at least part of the background is supported by liquidity. The last FOMC casts shade on the probability of unlimited liquidity.
https://www.axios.com/2024/12/20/big-tech-capex-ai
Bonds wobbly
December 27, 2024
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–In the last two sessions, Tuesday and Thursday, USH5 contract made new lows (113-06 and 113-03) but then closed near the highs of the day (113-28, 113-30). Yesterday was an outside day with a higher close. This price action suggests that selling pressure is becoming exhausted, HOWEVER, this morning’s low is 113-08 and the cash bond yield is again over 4.80, testing the year’s high of 4.813 set in April. A close below 113 would suggest a test of 5%. The high yield in 2023 was 5.115%. The front bond contract at that time reached 107-27. On the opposite end of the world China’s 10y continues to make new low YIELD at 1.70.
–TYH5 settle 108-20. Jan treasury options expire today. Late mkt in Jan 108.5/108.75 strangle was 6/8, indicating a quiet Friday, but the contract currently prints at the lower strike. There are 55k open in the Jan 108.5p strike and 45k in the 108.25p. Not really enough to cause panic, but in a market with fewer participants, maybe an opportunity for a washout. On the call side, just 26k 108.75c and 43k 109c.
–ABC news has this snippet:
Retail sales climbed 3.8% from Nov. 1 to Dec. 24 compared with the same period last year, Mastercard SpendingPulse data showed. The boost in spending exceeded a Mastercard SpendingPulse estimate of 3.2%, while outperforming last year’s growth of 3.1%. The retail sales data excludes automotive purchases.
“Solid spending during this holiday season underscores the strength we observed from the consumer all year,” Michelle Meyer, chief economist at the Mastercard Economics Institute, told ABC News in a statement.
Not much in excess of inflation, but I suppose it goes in the win column.
