The Semiconductor Squeeze Cracked, And The Two-Year Treasury Wouldn’t Rally

Educational market commentary. Not investment advice. Not a recommendation. Not a solicitation.

By Michael Kramer, Mott Capital Management

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Today’s tape:

Dispersion · Implied correlations · Semis positioning · Broadcom · Jobs print · Fed-funds repricing · 2-year Treasury · ECB · BOJ · KRW · CPI ahead

The big picture:

“Two-year rates went up, and they never came down.”

Where we are:

For weeks we’ve been pointing to the same vol structure — semiconductor call-froth driving single-stock implied vol higher, three-month correlations back to their July 2024 low, dispersion at crisis-only extremes. Broadcom’s results were the catalyst that the prior week had flagged as the test, and the unwind ran through the names that had built the squeeze. What changes today is the rates leg: two-year yields stayed elevated through the sell-off, and the curve’s tilt now reflects a market considering the Fed may need to raise, not cut.

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Video

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Setup of the Day

The call-froth squeeze cracked Friday — but the flight to safety never showed up, with two-year yields staying elevated through the rout. The test is whether Monday absorbs the move, or whether CPI Wednesday and a weakening Korean won extend it.

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Tape Card

The Read

• Friday cracked on positioning as much as on the headline. S&P −2.6%, Nasdaq −4.75%, with the violence concentrated in the same semiconductor names that had been driving the dispersion-correlations spread to extremes all week. The hot jobs print lit the fuse; the over-positioning supplied the powder. (Dispersion = the gap between single-stock and index-level implied vol; wide dispersion means names trade on their own stories rather than together.)

• The semi-positioning visibly reset in one session. Tuesday’s SMH top-10 ranking implied vol in the 80%-plus zone for essentially every name except NVIDIA, with a rich call-side skew across the board. By Friday’s close, the median had shifted materially — calls and puts were much more evenly balanced — even with IV still elevated. The over-positioning piece flushed.

• Broadcom was the catalyst that the prior week flagged as the test. Heavy IV into the print, call-heavy positioning, and a weight that now sits above META and just below AMZN in the index. The post-earnings move was a ~12.5% drop Thursday followed by ~8% on Friday — a meaningful contributor to the index move and a clean read on what “the squeeze cracking” looks like in a single name.

• The flight to safety did not arrive — that’s the bigger tell. Two-year yields rose after the jobs print and never gave back the gains, closing at their highest level since February 2025. The ten-year rose about 6 bps and held. The curve modestly inverted on the day. A growth-fear sell-off looks different than that — this was a rates-driven equity sell-off, not a defensive bid.

• Fed funds futures are leaning toward a possible hike rather than a cut. December 2026 is near 3.86% (above the current 3.50–3.75 corridor), with December 2028 near 4.16%. The market isn’t pricing the certainty of a hike — it’s pricing that the next move may not be down. That’s a regime change from where the conversation sat even two weeks ago.

• ECB and BOJ lie ahead. Markets price a near-certain ECB move on June 11, with the path implying further moves through mid-2027. The BOJ is priced around 80% for June 16, with the yen pushing back toward levels last seen at the April intervention. Foreign central banks tightening into a Fed that may have to follow is the rates picture underneath the equity move.

• The Korean won is the under-the-radar story. Closed at its weakest level versus the dollar since the 1998 Asian-currency crisis, after roughly a 3% week and a 1.7% move on Friday alone. Korea’s cumulative US-equity holdings now sit close to Japan’s — and the growth rate in those holdings has run ahead of the S&P 500’s appreciation, which is a flow signature, not a price-only signature. If the won keeps weakening, repatriation pressure becomes a legitimate question for the names that have been bid hardest.

On Deck

• Mon 6/8 — US reopen. After Friday’s −2.6% S&P / −4.75% Nasdaq, the VIX cash at ~21.5 and the VIX 1-day at ~28.7 give room for a reset; the question is whether overnight Asia and follow-through deliver a gap lower or a bounce.

• Wed 6/10 — US May CPI. Expected hot. The composition under the headline matters as much as the headline this month, given the rate-path repricing.

• Thu 6/11 — ECB rate decision. Lagarde’s framing of the forward path is the real signal.

• Tue 6/16 — BOJ rate decision. ~80% probability priced with the yen back at post-intervention levels — pace matters more than print.

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Commentary

Transcript Edited by Claude (Can Make Mistakes)

The Mechanics Were The Warning

Markets came in really hard on Friday and for most of this week. The S&P 500 was down about 75 basis points on Tuesday the 3rd, recovered some on Wednesday the 4th, and then fell about 2.6% on Friday the 5th. The Nasdaq fell nearly 4.75% on Friday.

Understanding the mechanics of the market was really the warning that this was getting overheated — and was not going to end well once it broke. Whether or not Friday is a one-day event is hard to say. Typically you see some form of follow-through early in the week after big moves on Friday. Volatility levels also went out fairly high, so we’ll have to take a look at those as well.

The Semis Repositioned In One Day

When we talk about positioning, what we’re looking at is historical realized implied volatility versus historical skew. I took the top ten stocks in the SMH to get a sense for where everything was. When names sit in the lower-right corner of that map, it tells us calls are extremely rich and implied volatility is extremely high.

On the snapshot from June 2, every stock in the SMH top ten had implied volatility in the 80%-plus range with the exception of NVIDIA, and every one of them had really rich skew on the call side. The one-year median sits much further up the chart — implied vol around 70%, skew more modestly call-side. June 2 was a long way from the median.

Compare that to Friday’s close. The median shifted dramatically higher, so we’re much more evenly skewed between puts and calls. Implied volatility is still extremely elevated, but it’s cooled a little. The skewness evened out, even with implied vol still high. That’s a big change.

Going into Friday, the picture was really heavy concentration of positioning in semiconductors, with the market aggressively betting on these things continuing to rise. By the close on Friday that had clearly shifted to something more neutral, even though implied volatility levels stayed very high.

Correlations And Dispersion Played Out

Another way to see how off the market was is just by looking at correlations. The implied correlation index had gotten down to levels not seen since July of 2024. That’s basically telling us that individual-stock implied vol was moving in a different direction from index-level implied vol.

When you look at dispersion, it was the mirror image — dispersion reaching levels not seen since the tariff tantrum, and really not seen since COVID. Dispersion moves on a fairly seasonal pattern, mostly because you see it rise into earnings season and fade as you exit earnings season. So with Broadcom’s earnings this week, dispersion was already structurally bid.

The Mag 7 names are usually thought of as the major drivers of the market, but Broadcom is up there now — its weighting is bigger than META and just below Amazon’s. Broadcom’s results have a really big impact on the tape. When Broadcom has implied volatility levels that are extremely high going into earnings, that skews the volatility picture too. That’s probably one reason all of this started to unfold after Broadcom reported Wednesday afternoon.

Broadcom Was The Catalyst

I’d flagged that there were major risks last week around Broadcom — that implied volatility was very high, that positioning was very much to the call side. I even noted in the free update that Broadcom could mark a change in trend in dispersion. Too early to say whether or not that’s definitively the case, but the stock fell about 8% Friday following a roughly 12.5% decline on Thursday. So you’re seeing the aftereffects of Broadcom’s earnings still playing out.

Ultimately, the positioning in semiconductors is largely responsible for a lot of the violence on Friday. That’s not to say the market wouldn’t have been down — you had a hot jobs report, and major repricing of where the Fed really goes this year.

The Rates Tell

What stood out from Friday’s trading session is that two-year rates went up, and they never came down. They went up following the jobs report on Friday morning, and they never gave back any of those gains.

That’s important because normally, when you see a big sell-off in stocks, you expect a flight to safety — you go into treasuries. You did not get that on Friday. The two-year closed at its highest rate since February 2025. The ten-year also moved up about 6 basis points on Friday and held the majority of those gains. The curve even inverted a little, which I think is more of a sign that maybe the Fed is going to have to start raising rates. How much the curve inverts from here will tell us how much confidence the market has in that idea.

President Trump wants rate cuts, and Kevin Warsh was hired in part on the premise of potentially delivering them. But the market’s telling you you’re not going to get rate cuts — at least not this year, not based on the information we have at hand. The market is now leaning on the idea that maybe you’re going to get a rate hike. Fed-funds futures at 3.86 sit within the midpoint of a 3.75% to 4% rate, which would be higher than the current 3.50% to 3.75% corridor. That’s not pricing a 100% probability of a hike — it’s pricing that the Fed may have to raise rates. By December 2028 the picture is very different, with the rate around 4.16%. So whatever cycle we’re in right now, the market sees rates more likely than not going higher at some point.

CPI This Week

That brings focus onto a CPI report this week that is expected to be hot. It’s going to be an important read — not just the headline but also what’s beneath it: where the signs of inflation are leaking through to the rest of the economy.

The labor data is actually showing signs of improvement, which means the Fed doesn’t have to worry as much about the labor side. The Fed has to worry more about its inflation mandate. Central banks around the world have to worry about their inflation mandates too, because the ECB and the BOJ only have inflation mandates. That makes them more apt to hike than the Fed may be.

The Foreign Central Banks Are Hiking First

The ECB rate meeting is on June 11. Markets are pricing in essentially a 100% chance of a hike on June 11, and they’ll be listening closely to how Lagarde frames the path from here. The implied rate moves toward roughly 2.5% by mid-September, which would be the second hike, and around 2.75% by March 2027, which would be the third. Whether the hikes come sooner, faster, or more front-loaded — versus the ECB staying in a wait-and-see mode — matters a lot.

The BOJ is also expected to raise. About an 80% chance is priced for June 16 and 85% by the time you get to July. The yen weakened materially versus the dollar this week and closed at its highest level since intervention began at the end of April. The BOJ is going to have to think seriously about potentially raising rates, or risk losing control of the yen and moving back to levels not seen since July.

Add it together: the market is coming around to the idea that the Fed may have to raise rates this year, while central banks globally are raising ahead of it. The dollar index is moving up toward the 100.5 level, which is going to be the big test of the dollar — and that test may come sooner than later.

The Korean Won Is The Under-The-Radar Tell

Something else that stands out is what’s happening in South Korea. Most of what you see in South Korea is really driven by what’s happening in Samsung and SK Hynix — both of which have gone dramatically higher. But the Korean won has depreciated materially over the last few days, to the point where it’s at the weakest level versus the dollar since 1998, during the Asian currency crisis.

The bigger piece is that South Korea now has nearly the same amount of investments in US equities as Japan does. Japan’s holdings have been steadily growing alongside US equity prices — the growth rate has actually run a little ahead of the S&P 500’s, which suggests genuine additional funding coming in. For Korea, the growth rate in US equity holdings has easily outstripped S&P returns over the past year. So there’s actual money flowing in, not just price appreciation.

That matters here because it gives you a reason the Korean won may be weakening pretty dramatically versus the dollar. If you’re a Korean investor and you sell won, buy dollars, and buy US assets, you’re applying selling pressure to the won. Those assets are often flowing into DRAM, memory stocks, and chipmakers — similar to what’s been driving the KOSPI.

Friday’s move was material — about a 3% move just this week in the won weakening, and another 1.7% on Friday alone. Officials over there are warning about volatility in the currency, just like Japan. They don’t want it to depreciate too much, because that brings inflation. So this is a piece to watch closely over the coming days. If the won really begins to strengthen — if some of the US-equity money goes home — does that take a layer of the buying out of the market, and could that have led to some of what we’ve been seeing in the semiconductor space?

Where Monday Opens

There’s a lot to consider when thinking about whether the sell-off has legs. The VIX index closed around 21.5, which isn’t an overly high level. The VIX 1-day closed at about 28.7. A reading that high gives the opportunity for some kind of morning bounce once the market opens.

The question is where it opens. If futures open lower because South Korea sells off overnight, Japan sells off overnight, and Europe catches up to what happened here on Friday, you could be talking about bouncing from much lower levels. If things stabilize over the weekend and the market opens roughly flat, you could see a bit of a rebound as 1-day implied volatility resets lower. That’s harder to parse out and is going to depend a lot on where the market actually opens Sunday night.

A lot went into this week, and not much of it was a surprise if you’d been paying attention to how overcrowded some of the positioning had gotten. The bigger question is whether the move continues. A lot will depend on what happens with CPI, what happens with the Korean currency, and whether margin calls show up Monday morning.

Last Week: What We Saw

• The dispersion + correlations call — flagged the three-month implied correlation at a 2024 low and dispersion at crisis-only extremes, with index vol expansion as the likely catch-up. Played out — index vol expanded sharply Thursday and Friday and dragged the index lower.

• Broadcom as the catalyst — flagged as the print most likely to be the test, given its weight, IV setup, and call-side positioning. Played out — Broadcom delivered the trigger, with the two-day move accounting for a meaningful share of the index drawdown.

• The semi positioning unwind — flagged the SMH-top-10 IV-and-skew cluster as the structural over-positioning. Documented in real time — Tuesday’s call-side cluster reset toward a more balanced put/call distribution by Friday’s close.

• The 2024 analog and downside math — flagged the 2024 pattern (S&P −10% / Nasdaq −16% peak-to-trough) as the historical reference, while acknowledging the timing was open. Partial — Friday delivered the kind of single-session move that fits the early leg of that pattern; whether it extends is the open question this coming week.

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Defined Terms

• Implied correlation — A market-implied measure of how synchronously index constituents are expected to move. Low readings mean names are going their own way while index vol stays subdued; the readings reached this week are historically rare.

• Implied dispersion — The mirror image of implied correlation: the gap between single-stock implied vol and index-level implied vol. Wide dispersion says single names are trading on their own stories rather than together — typically a feature of earnings season or stress regimes.

• Skew (call-side) — The relative pricing of out-of-the-money calls vs. puts. “Skew to the call side” means calls trade richer than puts — unusual for equities, which are usually put-skewed — and signals heavy upside (call) demand or speculative positioning.

• VIX 1-day — A short-dated cousin of the VIX measuring expected one-day S&P 500 volatility. Closes well above the regular VIX after large single-session moves; a high VIX 1-day going into the weekend leaves room for a reset lower if conditions calm.

• Fed-funds futures — Exchange-traded contracts whose price implies the market’s expectation for the average effective fed-funds rate over the contract month. Comparing the implied path to the current rate corridor shows whether the market is leaning toward cuts, holds, or hikes.

• Curve inversion — When shorter-maturity Treasury yields rise above longer-maturity yields. Inversion on a sell-off day (rather than a rally day) is unusual and tends to point at the policy-rate side of the curve rather than at growth fears.

• KRW repatriation — When investors that have been buying US assets in USD (funded by selling their home currency) reverse the flow — selling the US asset, buying back the home currency. A sustained move can take a layer of foreign buying out of the names those flows had been concentrated in.

• Constituent vs. index vol divergence — When the vol of the individual names rises while the vol of the index falls. It’s the mechanic underneath the dispersion and correlation moves and the structural read on positioning concentration.

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Disclaimer

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