When credit turns
March 14, 2025
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–New all-time high in gold yesterday and this morning GCJ5 is up over $17/oz just above 3008. GCJ5 settled 2991.30, +44.50. This, despite Schumer’s reversal, which for now, averts the chances of a government shutdown.
–Yields fell yesterday as equities continued to decline (SPX -1.4%). Tens down 3.4 bps to 4.276%. Ten-yr has been holding right around the Fed Effective rate of 4.33%. The 2y fell 4.6 bps to 3.95%. Ten year breakeven notched a slight new low at 231 bps. Today, U of Mich releases inflation expectations with 1-yr at 4.3%, same as last, and 5-10yr expected 3.4% from 3.5% last.
–Not much to report with respect to SOFR contracts. SFRZ4 to SFRZ8 rose 4 to 5.5 bps. All contracts in the two years from Z5 to Z7 are between 9636 (Z5) and 9649.5 (U6), consistent with a forward FF range of 3.5 to 3.75%. Current is 4.25 to 4.5%. March SOFR options expire today.
–Fed’s Z.1 report showed Household net worth rose $164 billion in Q4. In Q3 it was up $4.8 trillion! Q1 not looking good…
–A couple of weeks ago I noted some decent size open interest in puts on HYG, a high-yield etf. From the chart below, probably would have been better on JNK as that has broken down more decisively. One of the ‘financial conditions’ parameters reviewed by the Fed is credit spreads. While still low, these spreads have perked up a bit. It seems to me that the growth in private credit came after the regional bank meltdown in 2023. Silicon Valley Bank failed almost exactly two years ago. I don’t know a lot about the regional banking crisis, but I wouldn’t characterize the problem as bad loans, but perhaps loans provided too cheaply, as if the low rate regime would last forever. Depositors pulled funding like a rug, and it was game-over. Private credit and equity investing is supposedly a way to juice returns, but in this case I don’t think the funding can easily be pulled, nor do I think it’s appropriately marked-to-market. It can, however, completely dry up. Slower deterioration.
