Someone looking for a blow-up?
February 21, 2025
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–Just considering yesterday’s flows, and this isn’t particularly rigorous analysis, it seems to me that someone is betting on an accelerated easing timetable, and that longer dated treasuries may see rising yields either as a result, or as an independent move.
–Just after the FOMC minutes on Wed, which discussed a pause in the Fed’s balance sheet run-off, there was a large buyer of SFRU5 9625c covered. That buying continued yesterday paying 11.5 vs 9595 with 28d, I believe up to 50k (11.0s ref 9593). In any case, open interest in the calls rose 62k with total OI 152k. Adding to SFRU5 call open interest was a buyer of 50k SFRU5 9650c vs selling SFRZ5 9700c, taking 0.5 credit (had taken 1 credit on Wed afternoon. Yesterday’s settles 8.0 and 8.5, U5 9593 and Z5 9600). Considering these strikes in the context of Fed easing, current EFFR is 4.33 and the SOFR settings have been around that level or just above by a few bps. An ease would put EFFR at 4.08 or 9592, and SFRU5 settled 9593.0. So the 9625 strike is somewhat aggressive; something bad has to happen.
–Much more definitive was a new buyer of 110k FFK5 at 9571.0. Risk 4 to make 21 on an ease in March. The next meeting is May 7, so even if March results in no action, an ease at the May meeting would put FFK5 at 95.864. FFK5 settled 9572.0.
–On the TY side, early new buyer of TYJ5 108/110 risk rev vs TYH5 108-31, paid 8 for the put 50k. There was also a new buyer of ~20k TYJ5 109p cov 109-045, paying 41. Settled 39 vs 109-095 so 1’25 in the straddle. And a buyer of 20k TYK5 106p for 10.
–In conclusion: buying short-end calls and futures, buying TY puts. Invitation to put on 2/10 steepener? Not sure, but at 23.5 bps it’s near lower end of range… NOT ADVICE. DON’T DO THIS. YOU MIGHT LOSE. (There. A disclaimer).
–I would also note RECORD open interest in FV and TY at 7.147m and 5.621m respectively. A lot is driven by basis trades, which Vice-Chair for Supervision Barr touched upon in his comprehensive speech yesterday:
One area that has grown substantially is the Treasury cash-futures basis trade. The basis trade helps provide liquidity and price discovery in normal times, as hedge funds trade with asset managers and other financial institutions to align returns to holding Treasury securities and related futures. But the trade involves high levels of leverage, which can contribute to a rapid unwinding in positions and exacerbate market stress, as we saw in the spring of 2020. In principle, margining practices and participants’ risk-management activities should limit these risks, but individual firms do not account for the spillovers their actions can have on market functioning. These externalities suggest a role for regulation, and the central clearing mandate for Treasury market trading is an important step in supporting the resilience of this market. At the same time, we need to continue to consider how we can support the collection of minimum margin across trading venues and in bilateral trades to avoid loopholes and risks, and continue to monitor banks’ credit risk management practices with these hedge fund counterparties.
–I was taught early on that huge increases in open interest are potential tinder for the next big move. Longs and shorts have staked out their positions, one side is going to be badly wrong and have to scramble to cover. (That was from my technical analysis class given by Ken Shaleen when I was a runner on the floor. With all the complexities and ‘innovations’ in trading, I’m not sure if that idea still has merit, but I’m running with it).
–March treasury options expire today. Below is TY1 (rolling futures) with aggregate OI in blue.
