Powell faces off with the Senate
February 11, 2025
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–Yields little changed yesterday with tens +1 bp at 4.493%. Interest rate premium hit across the board, with many SOFR straddles losing a couple of bps. For example, on Friday, SFRU5 9593.75^ settled 40.75. With the contract +0.5 to 9593.5, that straddle settled 39.25 yesterday. SFRZ5 9600^ went from 60.5 to 58.5 with Z5 +1 to 9600.5. Large exit seller yesterday of 40k 0QZ5 9700/9800cs at 8.25 to 8.0, settled 7.75 vs SFRZ6 9607.5. In TY, the April 109^ was 1’62 on 3-Feb vs 108-30, yesterday down to 1’43 vs 109-065. Price action and volume are muted.
–Today brings Powell’s testimony to the Senate at 10. Prior to that Hammack (dissented in December to hold rates steady) speaks on the economic outlook. 3y auction of $58b. CPI tomorrow. Perhaps the most important issue for the Fed is that inflation expectations have been pushing higher. Overt recognition of that fact by the Fed Chair would likely be bearish. I’ll just note one SOFR option trade that would probably work on one hike by summer: +15k SFRN5 9562.5/9537.5/9525 put fly 1x3x2, for 0.75. Currently EFFR is 4.33 and SOFRRATE is 4.35 to 4.36, which wouldn’t quite get to the 9562.5 strike even with full convergence. So, this trades needs a hike, or a very strong perception of tightening, to work out.
–There have been obvious signs of stress for lower income consumers, and the middle market has been trading down to lower priced venues. From a BBG piece yesterday citing McDonald’s CEO:
“Across the industry, purchases from low-income guests were down substantially in the fourth quarter, Chief Executive Officer Chris Kempczinski said Monday on a call with analysts following the company’s earnings release.”
–Just a brief note about Treasury rolls, specifically TY:
In the past four days, the roll has traded -0.25 to +0.50. Currently 0.25/0.50.
For the first time in a while, there is very little duration difference between the two contracts,
DV01 in TYH5 is $64.09
DV01 in TYM5 is $64.22
–Yesterday morning there was a block roll of TYH puts to TYJ puts, which typically affects the futures roll. I would expect option rolls, given large open interest levels in TYH would become the primary driver of the TY spread. However, as of now, open interest in TYH5 is 4.888 million while TYM is just 46k. March options expire one week from Friday.
Note that FVM5 has about 6.5% more duration than FVH5 and UXYM5 has less than 1% more than UXYH5:
DV01’s on the contracts ($100k notional)
FVH5 $41.25
FVM5 $43.90
UXYH5 $87.45
UXYM5 $88.02
