Could Fed Flip?
January 23, 2025
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–Some large option trades in rates in an otherwise unremarkable session. Ten year yield rose 2.3 bps to 4.597%. Stocks soared. with SPX up 0.6% and Nasdaq Comp +1.3% just shy of new all-time highs.
–Early buyer (new) 50k SFRU5 9587.5/9562.5/9537.5p fly for 7.0. Settled there vs 9596.5. For a roll comparison, same put fly in SFRM5 ref 9588.5 is 9.0. And in SFRH5 vs 9575.0, 13.75s.
–Exit seller 60k SFRM5 9612.5/9662.5cs 4.25 to 4.0; future settle 9588.5, with cs settle 3.75 (7.0/3.25).
–New buyer (add) 30k 0QM5 9712.5c 4.5; settled 4.25
–Exit seller 50k 0QH 9550p at 2.5 covered vs 9600.5 down to 9600.
–New seller 0QU 9600^ 5k 73.5 to 73, settled 73.0 ref 9598.0 in SFRU6
–New buyer 50k TYH 102p for 1.
–Recent theme in rates is a shift toward limited or no ease going forward. In SOFR yesterday, flows were mixed, but I’ll focus on selling calls, buying puts, selling vol. Near SOFR straddles eased by a couple of bps. The 0QU straddle was sold at 74 on Tuesday, and then down to 73 yesterday.
–Highest contract on the SOFR strip is H6 at 9600.5. But let’s consider SFRZ5 since it has over 1m in open interest and seems to be a favored vehicle for those that trade on the basis of Fed ‘dots’. Z5 settled 9600 and was at a peak of 9725 on Sept 11, just over 4 months ago. A yield jump of 125 bps since the first ease! The latest Fed projection for year-end 2025 on Fed Funds was 3.9% or a price of 9610. But that projection in September was 3.4%. Could we possibly get a shift in expectations (and dots) to something like 2 HIKES before year-end? Fed Effective is currently 4.33%. Is a return to 4.83% out of the question? That would put SFRZ5 down to 9515-ish. We don’t often see the Fed quickly reverse course once they’ve started a new (easing) cycle. On the other hand, look how quickly the new admin has upended previous policies. It’s day three! In that context, I might be more inclined as a buyer of 0QH 9550p for 2.5 rather than seller. Something like 0QJ 9550/9500ps (SFRM6 underlying) is around 4.0. Not a recommendation, just a thought process.
