THE ZIRP IN SWAPS
Summary: How negative can swap spreads go? Both the 10-year and 30-year maturities once again nearly hit a record earlier this week. Having barely moved since April, the question is, why? That contrast to stocks which have been furiously re-risking is more than enormous, there is a profound set of differences at work. Swaps aren’t just betting for a set of pessimistic scenarios, they’re also betting against interference on the forward rate curve. It all comes down to what really happened in April. I don’t mean tariffs.
EVEN SHELTER SHAKES OFF THE FAKE
Summary: That makes five in a row. Five months after tariffs were applied to the USA’s largest trading partners, evidence for any possible “inflationary” impacts remains thin. The fact it isn’t completely absent, however, has become the latest basis for the new tariff-inflation expectation coming later this summer. Meanwhile, what was actually in the CPI related more closely to real economic conditions came to show the opposite. Believe it or not, the latter now includes the shelter index for the first time since early 2021! Just as we predicted, even that significant shift won’t matter to the wafflers.
CENTRAL BANK WEEK, PART 2
Summary: Sweden cut. Bills are feeling the debt ceiling. Again. But the Fed didn’t just sit there doing nothing, it actually offered nothing. Its entire purpose is at least to pretend to be accomplished, to be in a position to offer guidance and clarity no matter how inane and off. This year’s FOMC can’t even manage to do that - and they just told the world.
SLR IS NO GOSSIP
Summary: Ever since the basis trade blowup, even before then, government officials have been mulling a change to the SLR. This is the Basel 3 rule which primarily governs bank capital and has been advertised by regulators as a possible fix to “Treasury market liquidity” in times of strain. If they don’t then immediately add the term “repo” to any plan, you know not to take it seriously. But who did it come to be this way? Today’s DDA looks at what’s happening now, the dives deep into the story behind it.
SWAPS AND GOLD BACK BAD DEALER BILLS
Summary: The end of the first quarter saw a mess of triggered deflation. While the conclusion of the second doesn’t have that, not right at this minute anyway, it isn’t anywhere close to enough different. The 4w bill is misbehaving and we’re seeing dealers take a particular interest in those and similar instruments. We also have swap spreads and the metal ratio scraping along at basically the same levels as April. The background context for the monetary and financial world at the start of 2025’s second half hasn’t changed much at all.
BOJ, JGBs, AND CHINESE ZOMBIES
Summary: With another possible oil spike lurking, you might think it would add to the JGB market’s wariness over the BoJ. After all, the detached irrationality of Bank of Japan policy is the sole reason why ultra-long JGB bonds have sold off and as much as they have. It isn’t fear over government debt, its inflation lunacy in Tokyo. And this is another one you don’t have to take my word for. Instead, the rest of the markets clearly understand higher oil adds to the growing goods economy payback we see emerging already in places like Canada, Britain, and Europe. If all that wasn’t enough for a Friday, Chinese banks and its zombie producers both fit right in to all the rest.
PRICE WARS AND TRANSITORY YELLENS
Summary: In the wake of suspiciously weak American consumer price data for March and April, first Switzerland reported a negative, deflationary May CPI. It was quickly followed by European flash estimates also for May which unexpectedly undershot the ECB. Right when prices were supposed to be taking off, they are not. It is somewhat reminiscent of 2017’s wireless price war. Not specifically the war itself, rather the conditions which led up to it then came afterward. What Verizon and Janet Yellen can tell us about the mysteriously weak price changes in the middle of 2025.
FISCHER-ING FOR DECOUPLING
Summary: Sweden is the latest to show negative GDP in Q1 even before getting to tariffs and the payback, joining the globally synchronized ranks of Japan, Britain, America. The bigger threat moving forward isn’t trade wars, it’s the distortion tariffs had already created from late last year. Comparing its effect this time around in 2025 to the supply shock in 2021-22 produces some eye-opening interpretations. In addition, the ISM’s manufacturing PMI for may suggests the payback hasn’t really started no matter how big while construction spending adds more cyclical clarity on weakness - if the data is good.
WHY SO GREEK
Summary: What Australia’s central bank did Tuesday, Sweden’s repeated yesterday. They call this forward guidance, and have even invented a whole theory behind it with special cases (styled in Greek references to make them sound weighty and important). Instead, the only part which really matters is why they feel it necessary to undertake these performances. Reasons which were adequately spelled out by Canadian updates, plus a possible puzzle in American home buying - as in, not buying.
NO PLACE FOR POLITICS
Summary: Catching up on March’s TIC from last Friday. There were a number of noteworthy results in it, everything from more resales, near-record China selling, deflationary correlations galore, and a sudden appetite by American banks to lend to Emil (at least to parties located near him). China, Japan, Cayman Islands, Treasuries being sold, repo being done, exchange values being set. Eurodollars everywhere leaving no room for politics.
IT’S NEVER WHAT YOU THINK
Summary: With a little more hindsight, we can look back on the events of early April and appreciate them for what they really were: pure liquidations. All the telltale signs were there, now exposed with more perspective. Going back into some of the more infamous monetary events of the past decades provides some insights into two key common elements that very likely still apply to the current case. Even as the financial world cannot re-risk fast enough…because it can’t.
INTERFERNCE REVERSION
Summary: OPEC’s action and oil’s fall didn’t happen in isolation, nor were they unexpected. WTI closely corresponds with a range of financial signals starting with bond yields (2s!) and swap spreads. As much as central banks have been interfering in rates like the cartel in oil, it could never last given the growing deflationary confidence coming from the deep fundamentals. Knowing how and why OPEC and central banks get these wrong simply confirmed the eventuality. That collision on display yesterday in Riyadh was again on display today in Tokyo. BoJ moved one step closer to truth.