Some inflation risks remain…
June 22, 2023
–Powell again today in front of Senate. Rates were little changed on the first day of Powell’s testimony, though there seemed to have been some coaching on [RISKY] changes in bank capital rules before the event. The ten year yield ended unchanged at 3.723% after a stellar 20-yr auction (4.01% vs pre-auction 4.027; bid/cover 2.87). Front SOFR contracts were slightly negative with SFRU3 -1 at 9466 and SFRZ3 -1.5 at 9479, as Powell maintained that further tightening is likely. Open interest fell in both contracts, -30k and -22k, so it felt like a bit of long liquidation. However, there was a new buyer of 50k (OI +36k) SFRU3 9450/9437.5/9425p fly for 2.25 to 2.5, settled 2.25. The middle strike objective is 5.625% or 54.5 bps above current EFFR of 5.08, so someone is taking the Fed dots at face value. That ALWAYS works, right?
–Another interesting SOFR option trade: buyer of 13k SFRU5 9750c for 45.0 and 12k SFRZ5 9750c for 48.0. These are long-dated green options with a 2.5% strike; long greens rarely trade. SFRU5 settled 9669.5, calls settled 44.25 with 814 days to go, while SFRZ5 settled 9675.5, calls settled 46.75, 905 dte. Deltas around 30.
–Slight new low in 5/30 spread at -14.7. There have been some long curve trades going through; if this spread can hold another day of Powell it’s likely worth taking a shot at the long side.
–Attached is chart of BBG Agricultural Index (BCOMAG). Nice upside breakout yesterday as grains exploded higher. Dec Corn +31 ¼ to 628 ¼ while Sept Wheat soared 39 ½ to 748 ¼ . I suppose there’s a possible small inflationary impact if this run were to take out last year’s highs.
