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Things are getting ugly, especially in rates and FX. Significant decoupling is occurring, indicating a potentially massive flight out of the U.S. and severe liquidity constraints now hitting the market. Rates rose sharply today as Fed speakers Mary Daly and Austan Goolsbee discussed the inflationary impact of tariffs. Perhaps the budget deficit of $1.3 trillion didn’t help things either.
I’m not sure whether the Fed speakers’ lack of urgency to cut rates or the inflation talk drove rates higher, but rates certainly jumped, especially for the 10- and 30-year, which rose by approximately 9 and 13 bps, respectively.
This led to the 10-2 spread rising by 15 bps through some serious bear steepening, bringing the spread to 56 bps. At this pace, the spread could reach the 85 bps region that the bull flag suggested a few weeks ago. More concerning, of course, is that tomorrow we have a 10-year auction, followed by a 30-year auction on Thursday.
The rapid rise in 30-year nominal rates has sent the 30-year SOFR Swap spread to around -100 bps, the lowest on record, and we are seeing similar moves across the treasury curve. However, my general understanding is that it is a sign of liquidity constraints.
Indeed, it could be a case of liquidity tightening, as we also saw repo rates trading higher today. Overnight repo rates reached 4.5%, just below the 4.52% level on March 31. This suggests we should see secured overnight financing rates move higher tomorrow morning, suggesting tighter liquidity conditions, similar to what we see at quarter or month end.
Additionally, we saw some huge and more critical divergent moves in USDCHF, which was firmer by 1.5%. What is important here is that it has wholly decoupled from nominal Treasury rates. Higher rates in the US typically lead to a weaker CHF, not today and not the past two days.
It was notably the same with the USDJPY, which was stronger on the day by more than 1%.
When rates rise and the dollar gets smoked, only two thoughts come to mind: either a capital flight out of the US or investors are starting to focus on the rising prospect of a stagflation hitting the US economy. Today, we saw the 1-year inflation swap rise to 3.47%, which could indicate the markets’ worries over stagflation.
Unfortunately, I am merely an observer of the market, an outsider looking in, so I can’t know what is taking place. But as an observer, I can tell that none of it looks good. It is most certainly not bullish for risk assets.
As a result, the S&P 500 saw an intraday reversal of nearly 6%, finishing the day lower by 1.5% after being up about 4% this morning.
If this wave is three down, I could argue for the index to hit 4,680, the 1.618% extension off the bear flag cited about two weeks ago. The move to this point is too impulsive to be corrective.
-Mike
Terms By ChatGPT
1. Decoupling – In markets, when assets or indicators that typically move together start to behave independently.
2.10/2 spread – The yield difference between the 10-year and 2-year Treasury bonds; a key economic indicator.
3.Bear steepening – A situation where long-term interest rates rise faster than short-term rates, often signaling inflation concerns.
4.Bull flag – A bullish continuation chart pattern following a short-term consolidation.
5.SOFR Swap spread – The difference between SOFR-based swap rates and Treasury yields, used to gauge liquidity and credit risk.
6.Repo rates – Short-term interest rates in the repurchase agreement market, reflecting short-term funding costs.
7.Secured Overnight Financing Rate (SOFR) – A benchmark interest rate for overnight loans collateralized by Treasury securities.
8.USDCHF / USDJPY – Currency pairs showing the exchange rate between the U.S. dollar and the Swiss franc or Japanese yen, often used in macro trading.
9.Nominal rates – Interest rates not adjusted for inflation, as opposed to real interest rates.
10.Stagflation – A rare economic condition where inflation is high, growth is stagnant, and unemployment remains elevated.
11.Inflation swap – A derivative allowing investors to hedge or speculate on future inflation.
12.Wave three down / 1.618% extension – Technical analysis concepts, particularly from Elliott Wave Theory, indicating strong downward moves and potential price targets using Fibonacci ratios.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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