Above are a couple of good primers on the impending roll out of SOFR. Stringing out 3 month SOFR futures in deep and resilient packages will be an important step in the rate's rapid jump from infancy to benchmark.

As this roll out has approached, a steady march upward has occurred in the soon to be tar-pitted rate sets that bench-marked money rates for the last 35 years. Much ink has been spilled of late to explain the relentless rise ex-post. Even Seeking Alpha, on Mar 13, posted on the now nearly 6 month rise with a chart. The "deep dive" amounted to "I'm no technician, but this looks like a breakout !" Sad trombone. We have been yakking about this rate adjustment (and cheering on its arrival) since Q4 2017. Now, looking forward to the April SOFR roll out and the May futures contract, these wider and higher sets offer a cushion to the largest switch from an existing rate base to a new anchor in monetary history.

Even with the long lead time for participant adjustment, billions of dollar (and yen and euro) products could find themselves adrift after the disappearance of their underlying. Nearly 2 million Eurodollar contracts traded from Dec 2018 to Dec 2020 last Friday alone. Over $10 T notional amounts remain in open interest covering the same term. This is a BIG universe and its getting a new Sun.

Of course, nothing will go bump or bang, let alone crash. Of course not. Just like raising the funding rate and shrinking multi-trillion dollar balance sheets, everything will go smoothly and just as planned (hoped). Considering the underestimation of most as to the already significant rise in term structure sets, we feel the potential depth and liquidity needs of the soon to be hatched market will be too shallow for efficient operations. An unexpected need for actual dollar funding in the first 6 months (minimum) of SOFR bench marking could become dicey. The predicted non-event re-Sunning of the financial universe will need a narrowing of current relationships to confirm.


Today's Un-enjoyment figures posted under an old rule of thumb I used to promulgate back in the dark ages on CNBC. Simply stated, The most accurate employment data set occurs when an outside "miss" (up or down) carries 2 month's revisions in the SAME direction of the print. Such as the case today.

The labor pool is showing some elasticity but I can certainly attest to the dearth of skilled labor here in CA. The wage component is annualizing around the 5 year T rate.(see below - but GDP prints of 5 are possible in our calculations) Businesses have moved quickly to support the fiscal stimulus the Administration has tossed on the already vibrant up cycle.

My post-mortem  of the release is a reminder that our market based neutral model had been leaning in this direction since early Q4 2017. Presently, with a 12 month money set of 2.53, (le cinco es 2.66 !) and the other strong stim, our calibrated neutral rate for FF in the policy corridor is around 2% and .75bps from the lower floor. Policy today is dialed up near 11 a full eight years into the economic advance as  Old World and New Frontier economies brighten.

We will be shifting our focus to the potential "whip-snap" effect in the term structure as J.C. Lately and the Powell Fed Flap-jawers have finally bought into what Mr. Money Market has been screaming for months. The unintended consequences and unknown unknowns of Op Twist and moving rates before balance sheets could take shape as Q2 bleeds into 3. (this has always been our gripe with bandwidth filled with equity pundits hyperventilating over today's price action - money is a good 6 months ahead of them) Eurodollars for the end of 2019, and those of the Green persuasion will have our attention into and well out of St Patrick's Day.



Policy makers are turning to Nobel winning theories in behavioral macro in the wake of the Florida school shootings. Perhaps the Powell Fed will embrace similar thinking as decision making becomes more difficult in 2018.

The Fly in the Toilet

One way the FOMC could "increase its aim" is to allow policy to be nudged in the market determined direction. This simple compass calibration would actually be a radical departure from the last 30 years of leash pulling. Using our cocktail party rule for neutral, the current FF rate would be around 1.75 if Mr. market could set it. Toss a late cycle, full employment tax cut and a potentially pro-cyclical budget agreement and "neutral" tilts a tad north of that rate.

The Unseeded Hurricane

Two high decibel attacks on innovative monetary policy during the crisis ("defining down monetary pornography" I believe was the way one delusional CNBC contributor - I heard he was awesome - termed it) were : 1) It would be "better" to let everything fail

2) Deficits are bad

The former was a counter factual value judgement and the latter was a straw man handcuff that forced monetary policy to perform even heavier lifting. In behavioral terms, if you seed a hurricane you accept the liability of the landfall. Extraordinary monetary policy, euphamized as QE, now must accept the consequence of a successful landfall. Too many have locked into the balance sheet rolloff camp under slow rate rise Zoloft, in our opinion. Dumping securities and holding the anchor rate slightly lower than neutral (maybe just a nudge higher) should be an option, at least. Continuing to fiddle with the funding rate will increase impacts in the already messy fulcrum of the curve. (Year money at 2.39 today and 5 yr at  2.66+ and the 2 at 2.23 (auction day))

Was he a good dog? Who's to say, but he didn't deserve to die

Should the normal arc of Federal Reserve tightening, snugging, nudging cycles prevail; The Fed will own the expansion's demise. For many perma-bears and apopleptic TV bond reporters, this would verify their long held inaccuracies about the cycle and the bold innovations that nurtured it.



Resignation Boogeyman

Now that equity markets have broke loose from the velvet ropes of global CB policies reverse engineered for low vol and promoted as "Zee Stabeeelitee" - the "Bond Market" has once again found itself the near universal boogeyman excuse for the violent sloshing around. Got that? Move along, nothing to see here...millennial buying opportunity..yada yada ....

Now, if my martini soaked brain serves me correctly, same said pundits were trotting out all kids of graphic representations 6 months ago showing how the Fed's actions and the subsequent rising of the rates was all sorts of positive for their out over their skis equity holdings. The long flattening twist to the yield curve was also hunky-dory because the general direction was North.....they said. Presently, a jolt back steeper in a vol spike causing all matter of unwinds, is all Martha Stewart "good thing."

Speaking for the Bond Market, "I turn my back on this world. I'll turn my eyes from this world, Oh well...."

As we have mentioned before - and @Conorsen has also - from Oct thru Jan STIR futures broke away from the pre-ordained, vol suppressing, "we will tell you what we're doing" openness of the FOMC. Massive pro-cyclical fiscal initiatives at full employment 8 years into an expansion improving around the globe doesn't jive with "measured." The positive effects of "twisting" come with a caveat of "for a little while", then funding costs start to nip ya. Our core belief from 2016 remains in tact - Interest Rates Rise and that's different from 35 years of the opposite. (If you want to see a good graphic look at ZEM19 Monthly !)


Super Bowl

The Sp opened 17 lower after ripping down several Dog patterns and the Weekly.

A few lost souls began hoping for an FTQ to save their rapidly decaying bond holdings ...lo siento.

Watch the 2731 1st number down into the Mon actual open (2733 low so far) -

once the opening range is established at 8:31ct you can use that as good marker for LFTH


No, not the poorly done Bruce Willis vehicle from 2009. Today, the dog barks about the defining down of discourse through the use of "surrogates."

My personal experience with surrogate doping came from my days on CNBC. Since the fairness doctrine had been revoked (#GIK), either a second panelist or a follow up question was the accepted standard op when I appeared. I was generously compensated to give my views and the anchor always indicated my status as such. I can honestly say I never promoted a POV I did not fully endorse. I can also assure you that was not true of others in a like position as me.

Here's how: a phone call or email: Could you appear on- Insert Show Here- and say you don't like - pick Oil, S&P, Yen, 10 year Notes -here?? If you know me, I would rarely answer no to the latter, but certainly not if I was long/constructive. Many other guests in my position would accept the time slot and surrogate the predetermined viewpoint, take the cash and move on.

Today, the major networks (this post in response to a poor decision on CNN's part with a recent "contributor.") now regularly, nightly, always compensate a small gaggle of un-moored heads to spew a POV into the bandwidth under the cloak of diverse opinion. They often have weird pedigree's like "Former Communications Director of Such and Such" or "Former Adviser on Rush Hour Traffic To..." (If they're an expert on the subject why are they all former?) A confrontational delivery, goofy bow-tie or goatee, or southern drawl gets bonus points.

The truth is they are being compensated to spew their message as if clarifying the random ramblings of the POTUS. That is not journalism and no deeper understanding of an issue can be obtained by granting them a seat at the table. Their is a difference between a surrogate and a contributor that needs to be respected. These people are willing to prostitute themselves openly for the check. Both sides of the aisle are guilty of the surrogate vomit.

Here's a qualifying level for future Presidential candidates : if you need someone else to clarify your view through exaggeration, you're out.

The Universe Self Corrects


Kurt Andersen - Sept 2017

How America Lost Its Mind

The nation’s current post-truth moment is the ultimate expression of mind-sets that have made America exceptional throughout its history.

He is, first and last, a creature of the fantasy-industrial complex. “He is P. T. Barnum,” his sister, a federal judge, told his biographer Timothy O’Brien in 2005. Although the fantasy-industrial complex had been annexing presidential politics for more than half a century, from JFK through Reagan and beyond, Trump’s campaign and presidency are its ultimate expression. From 1967 through 2011, California was governed by former movie actors more than a third of the time, and one of them became president. But Trump’s need for any and all public attention always seemed to me more ravenous and insatiable than any other public figure’s, akin to an addict’s for drugs. Unlike Reagan, Trump was always an impresario as well as a performer. Before the emergence of Fantasyland, Trump’s various enterprises would have seemed a ludicrous, embarrassing, incoherent jumble for a businessman, let alone a serious candidate for president. What connects an Islamic-mausoleum-themed casino to a short-lived, shoddy professional football league to an autobiography he didn’t write to buildings he didn’t build to a mail-order meat business to beauty pageants to an airline that lasted three years to a sham “university” to a fragrance called Success to a vodka and a board game named after himself to a reality-TV show about pretending to fire people?

And here 's how it falls apart, or back together, but basically self corrects:

Beyond the cheering and the claiming responsibility for the great market advance is the gravitational pull of QE we outlined those many years ago. You remember right ? : When CNBC anchors would ask me about "excess reserves" and ZIRP and LSAP and I would be hung out as an Obama left winger for outlining a plan. QE inverted the historically normal progression of economic activity leading market movement. The whole purpose of the policy was to attempt to drag economic activity out behind monetarily supported risk assets. Remarkably, it worked better than even I had imagined. I was one who knew from the inside how massively upside down the financial system was and it scared me, so I became a "we should try and save it" pragmatist.

So, as the euphemistic terms of  "normalize" and "unwind" replace the harsh reality of tilting back toward stringency (or tolerate higher inflation) the markets will/are bring a fresh clarity to the fantasy land. Nothing tests character like a bleeding P/L. Interest rate markets are quietly moving into areas that are secretly keeping FI instrument holders from a peaceful  night's rest. A feeling many have never experienced before. The Trump Presidency is the acme of America losing its mind but that does not mean we won't 'find" it again. Sometimes, all it takes is a good hard slap in the face from Mr. Market.

Enjoy the entire article if you haven't read it on


Merc Stories Ch 3

The Dean Witter Govie Desk

I started as a house pit clerk in 1984 in the T-Bill pit signaling spread markets back to the Dean Witter Government Bond desk in the WTC. The team was an awesome melange of personalities and disciplines, some of whom I remain friends with to this day. The legendary Jon Eckstein, inventer of the year bill contract !, was our head. We were legit "playas" on the Street and threw cash and futures around in sizable quantities. 200 and 500 lot hits ( small now but ground breaking at the time), several basis points through the prevailing were common. We got early pings from the Fed on bill passes, matches and TTandL calls (GIK) [I remember a TT&L call that sent the market down about 15 bps in a heart beat, hilarious !] and Jon would ring down the line with calm orders into a 15 bid like, "12 trades, ok?" Meaning sell everything down to 12.

So, through the middle of 1987, the dollar was taking a beat down of serious degree. The dollar index had dropped from 124 to 96 by the Crash. As August 1987 rolled into September, the desk accumulated a steady stream of cash bonds and notes and with me, a heavy supply of this rapidly growing contract called Eurodollars. Now, keep in mind, most of these traders had NEVER owned "stuff" - we SOLD stuff - so taking huge hits and heat on long positions was not only gut wrenching but quite probably career ending. But, down went the buck and FI instruments right along.

By October, we were in lock down mode. A few big traders would come in early and ring me before the MD's could see them on the line and say things like, "K, buy 500 more Urins after the open, but don't ring back with the fill, we don't want them to see us on the line !" Order tickets were rumored to being stuffed in desk drawers. Several closed door meetings and position justifications took place. Several traders prepped me for a coming house cleaning but promised to get jobs elsewhere and come back to me. This was not well aligned with a "Stocks and Socks" vision. And then....

CRASH ! T-Bills went limit up on Friday afternoon and serious FTQ grabbing was everywhere. TEDs exploded only to collapse on Monday when Eurodollars opened on an indication of up 300 at up 400. A friend got on the line with me and bunched up all the desk's sell orders. I recall my partner on the floor and me selling huge amounts from 350 to 300 higher. Within an hour or so the market was only 10 basis points wide and we were still tearing down the majority of the position that only 36 hours earlier was hemorrhaging like the Exxon Valdez. The year was made and bonus', out of the question before, were back on the table.

In January, Witter management decided that perhaps the risks (there's that tricky word again) we were taking were not in line with the corporate structure. The operation shuttered not because we lost money, thanks to the crash, we had made a ton, because the volatility scared the bejeezus out of everyone.

The Skittles Incident

My long time partner on the TF was a living legend everyone knew as Stumpy. In a strange "small world" connection, Stumpy and I knew each other prior to working together. My college buddies and I were annual rabble rousers on the infield of the Kentucky Derby and had built a reputation and following as the guys from Cleveland who were able to get 20 to 30 gallons of Popov-laden orange juice into the infield every year. If you've ever seen the mountain of confiscated contraband at the tunnel entrance, you would understand what an achievement this was. So, it came  to pass that Stumpy  had visited our camp, randomly, in the early 80's.

Now, on the floor, we never left the desk for lunch breaks like other more mature operations. Stumpy and I would load up the security guards at Xmas and they would kind of, shall we say, look the other way- it was Chicago - while large quantities of food were smuggled to our desk. We had proudly pulled off a red/white checked table cloth Italian pasta lunch, 150 White Castle double cheese (the runner had to cab it to 2100 S Wabash), and several bean pies and Defenders from the Dan Ryan exit ramp to mention a few classics. On a daily basis, our runners looked like Tom Hulce at the Food King in Animal House, stuffed with McDonald's and pounds of candy and Hostess products. New candidates had their choices evaluated on "not held" orders and quality of fills on Hostess Strips (1 of everything). They say you better be able to defend your decisions in a Bridgewater confrontation, the same, or worse was inflicted on our teammates. An inadvertent Zero bar or passing up a Choc-o-dile could lead to weeks of torment.

So, it was Retail Sales day - the real trading day prior to the elevation of Unenjoyment Day to top volatility day.  Stumpy decides to do a candy line up (this is years before Seinfeld btw,)   of Skittles and tropical Fruit Skittles (1989 release) on the high desk between him and me. I'm not a big fan - from 7:10am right through the opening range- the 2 of us are critiquing the flavors. A few seconds before the data release, I tire of the product and FLICK a Skittle off into the distance. Some 30 feet away on the Pit is our clerk from Wisconsin, his badge was CHZ, and 7:29: 55, 56, BAM..Skittle right in the eye and out pops his contact lens. Down goes CHZ, down goes CHZ.  And boom  a huge Retail Sales report ! So, he's holding his eye and searching the floor and none of us can get an order in. Everyone is trying to sell and he can't see a thing.  I mean this is like big upward revisions, the Fed's doing early matches (GIK) and probably hiking at the next meeting type stuff. The guy is hauled up to the desk and berated by our bosses all the while trying to explain that something hit him in the eye, but they would have none of it.

Needless to say, Stumpy and I just did our best to not bust out laughing. That was the most expensive Skittle ever, and until now, only 2 of us knew.