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:
