A look at SFRM4 (just as boring as it sounds)
January 24, 2023
–PCE prices on Friday (Fed’s preferred measure of inflation). Two year auction today, followed by 5’s and 7’s Wednesday and Thursday.
–Last week, many trades focused on front March, June and Sept, in terms of pegging a terminal rate. Yesterday, the focus shifted to reds. For example, there was a buyer of 20k 0QM3 9600/9550/9500p 1x3x2 for 2.25 to 2.5. Settle prices were 14.0/5.0/1.75 so 2.5 ref 9559.5 in SFRM4. (0QM are midcurves on June’24, expiring 6/16/23). There was also a late block buyer of 72k 0QM3 9550p for 5.0. Open interest changes in the three strikes, according to prelim: +33k, +20k, -76k on volumes 37k, 160k, 76k. In any case, just to put the price of June’24 in context, SFRM3/SFRM4 spread settled -151.5 (9508/9659.5). SFRZ3/M4, six-month calendar, is inverted by over 100 (9558/9659.5). So there’s a LOT of easing priced in. Could the contract ever get to 9550? That would take a large shift in expectations, however, in November the range was 9553.5 to 9650, a huge 96.5 bps!. The range in December was 9616 to 9668 (52 bps). This month so far 9613 to 9690 (77 bps). The 9662.5^ settled 72.0. Clearly, if the market is wrong about easing prospects, as Waller suggested at the end of last week, then some sort of short in reds makes sense. However, the spreads have been inverted for a long time.
–MSFT earnings post-close.
