Stocks had a volatile session, broadly finishing lower. The sharp morning sell-off was unexpected, though the rebound was not. The real test comes tomorrow with $44 billion in Treasury settlements and the reverse repo facility now depleted, which could trigger a repeat of yesterday’s poor performance.

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The TGA climbed yesterday to $563 billion, up from about $520 billion the day before. If tomorrow brings another decline like we saw in the NASDAQ, it will likely reflect the impact of Treasury settlements and the depletion of the repo facility.

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For now, the S&P 500 is holding support at the uptrend. Even if that breaks, the key level to watch is 6,200. A break there could send us back into the 5,900s, and that’s when concerns would grow.

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The spread between the US 5-year and the 5-year JGB continues to decline, now barely holding above its lowest level since August 2022. Once the 2.65% spread breaks, there is little in the way of support, aside from minor levels at 2.37% and 2.10%. The strongest support sits at 1.94%.

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With the spread narrowing, dollar demand is weakening, as seen in the 5-year USDJPY cross-currency basis swap, which has become less negative at –13.5 bps. The trade appears to be swapping out of dollars and back into yen, as the cost of obtaining yen has eased. This suggests new carry trades are unlikely to be initiated, and if the spread continues to move toward zero, the risk of an unwind in existing carry trades will increase.

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In essence, this isn’t just a US dollar issue—it’s happening elsewhere too, such as in the MXNJPY. More interestingly, this FX pair has recently been trading in step with the S&P 500. We saw this dynamic in the summer of 2024, and it has been tracking the index fairly closely again for some time.

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This relationship becomes clearer when viewed in the context of the fall of last year. More importantly, if the MXNJPY is topping out, a break lower would likely coincide with—or reflect—a broader risk-off move, given how closely the pair has been trading with the S&P 500.

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