Time to be a contrarian

Macro & USD IG Overview

I went short on U.S. Treasuries today. Mostly 5 - 10yrs.

1) The extraordinary rally at the front end was partly driven by hedge demand for risk assets ahead of the NFP release (I participated in this as well), but now that event risk has passed.

2) The Fed funds futures (FF1-FF13) are now pricing in 220bps of cuts, which seems like an overshoot. In comparison, during the 2000 and 2008 cycles, it was about 180bps.

3) SFRZ5 settled at 2.85% last Friday, and the curve steepened approaching the market close. I believe we've reached the terminal rate for this cycle for now, and it would take more NFP releases to push that terminal lower.

4) The Fed generally doesn't make moves during the blackout period. The only exception was in 2022 when they leaked plans for a 75bp hike due to the high CPI. I don't see anything pressing that would force the Fed into action this week.

5) Equity futures took a hit after the NFP, but the VIX remained relatively muted. Asian markets today were resilient, holding key levels (like SK Hynix). I think last Friday's move might have just been noise.

I will add more shorts if:

1) Nasdaq futures hold around the 200-day moving average level (around 18,200).

2) Rates don’t break the highs from the NFP day.