Large SOFR call buys post-minutes
February 20, 2025
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–Early part of the session was quiet, though Housing Starts lower than expected at 1366k (1390 exp and 1515 last). I didn’t expect anything from FOMC minutes, as Powell and other officials had already indicated that inflation concerns would keep the Fed on the sidelines for the near term. However, post-minutes there was a flurry of activity due to unexpected discussions about balance-sheet runoff.
–A lot of SOFR call buying post-FOMC minutes:
0QZ5 9700c vs 9603, 16d. paid 10 to 10.5 for 50k. 10.5s vs 9604.5 in SFRZ6
SFRU5 9625c vs 9589.5, 26d paid 9.5 for 40k and vs 90.5 with 28d 10 for 5k. 10.25s vs 9591.5 in SFRU5
–Below are a couple of snippets from the minutes:
In considering the expected path of the federal funds rate, the manager noted that the modal policy rate path implied by options prices had not changed appreciably on net over the intermeeting period and was broadly consistent with a single quarter-point lowering of the target range for the federal funds rate taking place during 2025. [Market is pretty much in line with Fed officials’ comments]
In their expectations of Federal Reserve balance sheet policy, survey respondents on average saw the process of runoff concluding by mid-2025, slightly later than they had previously expected. [Powell in press conference didn’t seem too concerned about current reserves]
A number of participants also discussed some issues related to the balance sheet. Regarding the composition of secondary-market purchases of Treasury securities that would occur once the process of reducing the size of the Federal Reserve’s holdings of securities had come to an end, many participants expressed the view that it would be appropriate to structure purchases in a way that moved the maturity composition of the SOMA portfolio closer to that of the outstanding stock of Treasury debt while also minimizing the risk of disruptions to the market. Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event.
So there’s the catalyst. Balance sheet adjustment might be ‘paused’, and…if Fed holdings move more in line with outstanding debt, I think that favors a move closer in on the curve.
Below from BBG:
The minutes for the January FOMC meeting were generally in line with expectations. However, a nod to pausing balance sheet runoff during the coming budget negotiations — amid worries about swings in reserve levels — has both equities and Treasuries a touch higher. Given the lack of recent clarity regarding the Fed’s long-term plans for the balance sheet and where exactly “ample reserves” are, traders may be thinking once something stops it will be harder to restart.
–The surprising thing to me is that vol has generally been compressing, even as more plates are added to wobbling spinners already on sticks. That stopped yesterday. In a way, the Fed discussion underscores the Fed’s modus operandi: If the market needs liquidity for any reason, we provide it.
–Though rate futures have been fairly quiet, there ARE markets moving based on Fed and administration ideas: Fannie and Freddie have exploded higher (FNMA and FMCC). Privatization. The largest REITS, Annaly (NLY) and AGNC have had stellar rallies since early January. Tighten MBS spreads? On the other hand, market darling Palantir (PLTR) has dumped around 13% since Tuesday as the Pentagon looks to cut spending.
–Today’s data includes Philly Fed expected 14.3 from 44.3. Jobless Claims 215k (I guess they don’t expect to capture gov’t workers that have been cut, but it’s gotten to the point that DC real estate claims have to be “debunked”
https://www.realtor.com/news/trends/elon-musk-doge-dc-housing-market-crash
–These days every comment has to be prefaced with the disclaimer used by Chris Long (emphasis added):
If data is correct, there are over 12.5m people over the age of 120 receiving Social Security. If you assume $1000 a month (probably too low), that’s $150 billion a year in false payments. Pretty amazing stuff if it’s real.
