SFRH5 opts rolling off Friday. Where will SFRM5 be on 13-June opt expiration
March 12, 2025
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–Despite equity market volatility yields rose yesterday with tens up 7.5 bps to 4.286%. Today brings CPI and 10-yr auction of $39b. CPI expected 0.3 headline and Core with yoy 2.9 (from 3.0) and Core 3.2 (3.3). In February, the ten-yr breakeven (10y yld minus inflation-indexed 10y) hit a high of 247 bps. Now it’s 232. The low in 2024 came close to the Fed’s target at 203. My guess is that it will settle in around 220-225. The US market does not fear inflation. Even if crude oil bounces back near 70, it will be below year-ago levels.
–Ten-yr German bund yield is 2.90 this morning, closing in on the high-water mark of 2.97 in 2023. Since November the bund yield has surged nearly 90 bps.
–(Fortune) Goldman’s GDP projection for 2025 now sits at 1.7%, down from 2.4% at the start of the year. [below consensus]
“Instead, the reason for the downgrade is that our trade policy assumptions have become considerably more adverse, and the administration is managing expectations towards tariff-induced near-term economic weakness,” [Jan Hatzius] wrote Tuesday in a note to clients.
–March quarterly SOFR and midcurves expire Friday. SFRH5 settled 9571 yesterday or 4.29% against EFFR of 4.33%. SFRH6 settled 9647.5 for a spread of -76.5. With March rolling off, it’s worth looking at where M5 will ultimately settle.
–My base case is that the Fed cuts 25 at both the May and June meetings. SFRM5 options settle 13-June, FOMC is 18-June. The advance GDP report for Q1 comes out April 30, and it’s likely to be negative. Data probably isn’t capturing the extent of government cuts. Current EFFR is 4.33 and SOFRRATE is 4.33 to 4.37. A cut of 50 by June is 3.83 in EFFR. Next meeting is July 30, and will likely price some odds of another ease. SFRM5 settled 9599 yesterday. My peg for final settle is 9620 to 9623 (3.80 to 3.77). This is NOT a recommendation, but SFRM5 9600/9625/9643.75 broken call fly settled 3.5. Even if the contract were to settle above the top strike, fly would settle 6.25. so there would be a little profit.
