Powell today. SFRM4 down 50 in two days!

February 7, 2023

–Red SOFR contracts (H4, M4, U4, Z4, 2^nd year forward) were crushed again yesterday on NFP follow-through.  Down 24.5 bps on Friday and another 20 yesterday.  Post-settle yesterday SFRM4 traded 9619, Thursday’s settle was 9669, for a nice round 1/2% move in two days!  Recall there had been a block buy a couple of weeks ago in 0QM3 9550p for 5 (ref 9661.5), that strike was 10.5 bid late.  Good jump in vols associated with the move to higher yields.  At the Dec FOMC, the year-end 2023 projection for Fed Funds was 5.1%.  The market is starting to move toward that level as SFRZ3 settled 9527 or 4.73% and FFF4 settled 9521 or 4.79% (the block seller of 14k at 9559 pre-data Friday took his profit yesterday). 

–With weakness concentrated in reds, the near calendar spreads rallied, and spreads from reds back made new recent lows.  For example, June’23 to Dec’23 settled -39 (9488/9527) having been around -50 last week.  While pricing still reflects Fed easing into year-end, it’s less so.  Further back, reds to everything else made new recent lows.  For example, red pack was down 20 while greens, (3^rd year) were only down 14.375.  The spread between the two packs hit -61.625 (9631.375/9693.25), down 10 from Thursday.  2/10 treasury spread ended at -82, also a new recent low.  These spreads are indicative of a tight Fed that will clearly be successful in slowing the economy.  Of course, the move wouldn’t have been nearly as dramatic if positioning wasn’t offsides.  As of yesterday’s settles, NO contract on the SOFR curve is sub-3%.  Dec’25 and March’26 are peak contracts, both having settled 9699.5 or 3.005%.

–Powell speaks today, and just about everyone else associated with the Fed will be chirping in tomorrow.  Three-yr auction kicks off today, followed by 10s and 30s. Ten year yield ended 3.63%, with w/i a couple bps lower at 3.61. Midcurve Feb SOFR options expire Friday, with atm straddles on March’24 (9576), March’25 (9684.5) and March’26 (9699.5) all 14 to 14.5 bps.  An extra four weeks will cost you about 20 bps more, but straddles on more deferred contracts are nominally less expensive because volatility has moved forward and back month yields are lower. 
SFRH4 9576.0

0QG3 9575^ 14.5

0QH3 9575^ 35.5 for spread of 21

SFRH5 9684.5
2QG3 9687.5^ 14.0
2QH3 9687.5^ 34.0 for spread of 20

SFRH6 9699.5
3QG3 9700^ 14.0
3QH3 9700^ 31.5 for spread of 17.5

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.

  The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.