PORTUGAL AUCTION PREVIEW: On offer next week

Several US allies have distanced themselves from President Donald Trump's comments regarding the future of the Gaza Strip without directly criticising the president. US allies in Europe and elsewhere are facing the prospect of US tariffs on their exports and potential reductions in the US' NATO presence. As such, while advocating respect for international law and Palestinian rights, no US-aligned gov't so far has directly called out Trump for seemingly turning away from the US' long-standing support of a two-state solution. 

• UK PM Sir Keir Starmer, the French Foreign Ministry, German Foreign Minister Annalena Baerbock, and Australian PM Anthony Albanese, have all commented on Trump's plan for the US to 'take control' of Gaza. However, these comments have largely focused on encouraging respect for international law, protecting the rights of Palestinians, and avoiding pressure on Western allies in the region such as Egypt and Jordan. Western leaders have refrained from any direct criticism of the US president for outlining his plan in the first place.
• These cautious responses would seemingly confirm that the threat of US tariffs on exports, the prospect of a major reduction in the US' NATO presence (putting the onus on other members to massively increase defence spending), or both will limit the direct political pushback Trump will receive from allies, at least at the start of his second term. 

Richmond Fed Pres Barkin (leans hawk, non-voter) tells Bloomberg TV that he is "open minded" in his approach to policy and retains a data-dependent approach to the next Fed move, but overall suggests that the easing bias remains. Put another way, he is yet another Fed speaker who since the January FOMC has expressed very little urgency to cut rates in the near future, or even at all this year.

• Asked if tariff impact would delay the Fed from cutting rates, Barkin says "there's a lot of uncertainty" on the policy outlook and it's hard to know what is happening with growth and inflation "until you get more clarity".
• Says "the case for wait and see is, you want to wait and see." "On whether the Fed will cut at some point this year, "we will see what happens."
• On whether the Fed could hike rates "I never take anything off the table... you have to see an economy overheating and I don't see signs of an economy overheating. I see inflation coming down, I see the job market stabilizing...but we have the JOLTS data that seems to have come down."
• Says that policy is "moderately restrictive...I don't think we are hugely restrictive" but if the economy "comes back strong, you have to ask questions about how restrictive you really are."
• He notes that the last set of FOMC projections suggests a "lean toward cutting", but asked whether he was equally open to hiking, "that's another way to ask the exact same question - let's see what happens."

Trading desks report varied SOFR & Treasury options overnight, better volumes in Mar'25 10Y puts, 5- and 10Y midcurve puts as well. Reminder, March options expire on Feb 21, March futures roll to June at the end of the month. Underlying futures drift higher, at/near overnight highs w/ TYH5 highest since December 18. Projected rate cuts through mid-2025 gain slightly vs. late Tuesday levels (*) as follows: Mar'25 at -4.2bp (-3.7bp), May'25 at -11.2bp (-11bp), Jun'25 at -22.1bp (-21bp), Jul'25 at -28.1bp (-26.9bp).

• Treasury Options:
  • over 15,400 USH5 110 puts, 3 last
  • over 7,500 USH5 112 puts, 12 last
  • over 4,000 TYH5 107.75/108.25/108.5/109 put condors ref 109-16
  • over 17,000 TYH5 109 puts, 26 last ref 109-15.5
  • 3,000 TYJ5 109.5 calls, 57 ref 109-14
  • 2,000 TYJ5 114/116 call spds
  • 1,800 TYH5 110.5/112.5 1x2 call spds ref 109-13.5
  • 5,000 TYH5 106/107 put spds, 2 ref 109-13.5
  • 3,000 TYH5 110.5 calls, 14 last ref 109-12.5
  • 1,500 FVH5 105/105.5/106 put trees ref 106-22.75
  • over 10,000 wk1 FV 106/106.25 put spds ref 106-22.75 (exp Friday)
  • 4,500 wk2 FV 107/107.75 call spds ref 106-20.75 (exp Feb 14)
  • over 5,300 Wednesday weekly 10Y 109 puts, 4 (expire today)
  • Several wk1 TY put flows via outright, trees & spds, total volumes so far: over 12,800 wk1 TY 108 puts; over 19,200 wk1 TY 108.5 puts; over 13,000 wk1 TY 109 puts
• SOFR Options:
  • 2,300 SFRK5 95.62/95.75/95.81/95.87 put condors ref 95.90
  • 6,000 0QH5 95.50/95.81/96.00 broken put trees ref 96.14
  • 2,000 SFRM5 96.12/96.18 call spds ref 95.895
  • 1,500 0QM5/0QU5 96.75/97.25 call spd spd vs.
  • 1,500 3QM5/3QU5 96.75/97.25 call spd spd