US TSYS: US Trade Policy Rekindles Risk-Off Sentiment

• Heavy risk-off moves occurred Monday as Chinese AI startup DeepSeek rattled broader markets: new competition for US AI developers weighed heavily on chip stocks, the tech heavy Nasdaq falling over 3.65% in late trade, spurred heavy outright buying and short covering across the board in Treasuries.
• After the close, the Mar'25 10Y contract trades +22 at 109-05 vs. 109-12 high, just under initial technical resistance at 109-12.5 (50-day EMA), heavy volumes (TYH5 over 2.5M).
• Despite the rally, curves were mixed by the close, 2s10s -2.053 at 32.906, 5s30s +1.680  at 43.432. Nevertheless, projected rate cuts through mid-2025 regain traction vs. late Friday (*) levels as follows: Jan'25 at -0.7bp (-0.1bp), Mar'25 at -8.3bp (-6.9bp), May'25 at -15.9bp (-13.6bp), Jun'25 at -27.9bp (-24.7bp), Jul'25 at -33.7bp (-28.6bp).
• Focus remains on Wednesday's FOMC policy annc, no move expected, as well as a heavy slate of corporate earnings Tuesday: PACCAR, Sysco Corp, Synchrony Financial, Lockheed Martin Corp, Veradigm, Royal Caribbean, Polaris Inc., Boeing, NextEra Energy, JetBlue Airways, General Motors, Kimberly-Clark Corp, Invesco, Starbucks, Qorvo and Stryker Corp.

• BofA expect the BoC to cut the overnight rate target 25bps to 3.00% although the risk for the meeting is that it keeps rates unchanged.
• “With inflation mostly under control, we believe the BoC will choose to cut the rate to boost the economy and to use the CAD as a shock-absorber in the case tariffs are imposed.”
• “We expect the forward guidance to signal a pause as the BoC waits to see how both domestic activity and US trade policy play out.”
• “With inflation mostly under control and under our expectation that activity will keep improving we see 3.00% as the terminal rate. In addition, our US economists have the US Fed on hold throughout the year.”
• “Our economist's base case is for no tariffs against Canada. However, if tariffs were imposed, the BoC would likely cut rates in response, which risks further widening of the US-CA terminal rate differential.” Specifically, “the BoC may respond by cutting below neutral to use the CAD as a buffer.”
• Rates: “We have revised our CA rate forecast in response to our revised expectations for one more cut in 2025. We now forecast a 10y rate of 3.4%, which is roughly in line with forwards. […] BoC QT is now expected to end in Aug '25 with settlement balances around CAD$50-$70bn.”
• FX: "We see 1.42 as first-order target level for USDCAD. But USDCAD would break the 1.45 resistance level if tariffs are confirmed, reaching 1.50-1.55 if BoC turns dovish.”

Heavier two-way SOFR & Treasury options traded Monday, large risk Mar'25 10Y reversal taking advantage of the rally in underlying futures to hedge massive 108.5 call position build over the last couple weeks. Rally in underlying futures spurred by sell-off in tech sector on China's DeepSeek AI startup as competitor to various US AIs. The rally saw projected rate cuts through mid-2025 regain traction vs. late Friday (*) levels as follows: Jan'25 at -0.7bp (-0.1bp), Mar'25 at -8.3bp (-6.9bp), May'25 at -15.9bp (-13.6bp), Jun'25 at -27.9bp (-24.7bp), Jul'25 at -33.7bp (-28.6bp).

• SOFR Options:
  • +4,000 SFRN5 96.37/96.75 call spds 5.5 ref 96.08
  • -10,000 SFRH5 95.87/96.00 call spds 2.25 ref 95.805
  • +5,000 SFRM5/SRFU5 95.75/96.00 call spd spds 1 net/Sep over
  • +5,000 SFRG5 95.75 puts 1.75 ref 95.80
  • -2,500 SFRN5 95.75/96.37 strangle 14.75 ref 96.08
  • -2,000 SFRN5 95.62/96.37 strangle 15.0 ref 96.075
  • +2,500 SFRK5 95.62/95.75 2x1 put spds 1.0 ref 95.965
  • +5,000 SFRM5 95.68/95.81 2x1 put flys, 4.5
  • +20,000 SFRJ5 95.75 puts 2.25 ref 95.96
  • Block/screen, +30,000 SFRU5 96.37/96.62 call spds 4.5 ref 96.06
  • 5,700 SFRG5 95.68/95.75/95.81 put flys ref 95.805
  • 13,000 0QH5 95.50 puts ref 96.16
  • 2,000 0QH5 96.06/96.18/96.50 broken put flys ref 96.155
  • 4,000 SFRH5 95.87/95.93 call spds ref 95.815
  • Block/screen 6,000 SFRG5 95.68/95.75/95.81/95.87 put condors, 2.75-3.0
  • 3,000 SFRH5 95.68/95.75/95.81 put trees
  • +6,250 SFRH5 95.62/95.68/95.75 put flys, 2.25 ref 95.805
  • +5,000 SFRU5 96.25/96.62 call spds, 7.5 ref 96.065
  • 1,500 SFRZ5 96.00 puts ref 96.115
  • 1,500 SFRM5 96.12/96.37/96.68 broken call trees ref 95.955
• Treasury Options:
  • +20,000 wk5 TY 107.25 puts, cab-7
  • Update, over 49,000 TYH5 107 puts, 8-9 ref 108-31.5 to -30
  • Block/screen, +70,000 TYH5 108.5/110.5 put over risk reversals, 17 net vs.109-03/0.60% (+33k at 15/screen) ** reminder - nice hedge for some acct that bought some +75,000 TYH5 108.5 calls Friday at 41 ref 108-14.5, adding to +100k+ from 27-29 on Jan 14, just prior to CPI-tied bounce in underlying).
  • 1,500 USH5 107/109/111 put flys ref 114-17
  • 4,000 FVJ5 108 calls, 11.5 ref 106-22
  • 4,000 FVH5 106.5/107.5 call spds
  • 10,000 FVH5 107.5/108.5/109.5 call flys ref 106-17.5
  • +17,500 wk5 TY 110 calls, 6-10
  • 3,350 wk1 TY 107/107.5 put spds ref 109-03