Capital Flows
· Capital Flows
· July 11, 2026 at 01:00
· ⏱ 3 min read
| Read on Substack ↗
Summary
The SOFR curve and front-end rate volatility are the key drivers of macro liquidity, not recession fears. The market is genuinely split on the Fed's next move, with July 29 meeting pricing near a coin flip (66% hold, 34% hike). Equities are skewed higher between catalysts as rate vol remains low and recession narratives fail the data test—nominal GDP at 5.8%, ISM manufacturing accelerating. Japan's negative real rates on short-term debt mechanically weaken the yen via a transfer from savers to the government.
•For the first time in years, the market cannot decide if the Fed's next move is a hike; July 29 meeting pricing: 66% hold, 34% hike, with ~51 bps of hikes priced to terminal.
•December 2026 SOFR contract is the largest by open interest in SOFR history, with open interest up 28% in just over two months.
•Z6/Z7 and Z6/Z8 calendar spreads price only 6 and 14 basis points of cuts, implying risk of sharp repricing if the Fed overtightens into disinflation.
•Rate volatility pools at FOMC meetings and data catalysts, going quiet between them; currently low vol is why higher rates are not contracting liquidity.
•Recession narrative fails data test: nominal GDP running at 5.8% against 2% real, ISM manufacturing accelerating for five-to-six prints, industrials and financials at all time highs.
•Japan funds heavy government spending with short-term bills where real rates are negative ~-38 bps on the 2-year; this transfer from savers to the government is the mechanical reason for yen devaluation.