The Fat Thumb Presses Down on Red SOFR Contracts
March 2, 2023
–Well, the guy who hoovered up 60k 0QJ3 9500 puts for 7-7.5 on Tuesday afternoon seems to know what he’s doing, as SFRM4 fell to a new low settle 9536.5 (-12 on the day) and the puts settled 10.25. Higher yields across the board, where tens rose 7.7 to 3.991% (and >4.04% this morning), while the short end led the way with 2s up 9 bps to 4.885%. On the SOFR curve, SFRU4 and Z4 were weakest at -12.5 (9576 and 9605.5). All near calendars made new highs, while spreads from reds back made new lows. SFRH3/H4 finally settled positive (9499/9496.5). However, the most inverted one-yr calendar on the strip is Z3/Z4 at -138.5, indicating strong expectations for ease next year. Though front end option plays have focused on rising rates, there is still accumulation of some upside plays. For example, a buyer over the last two days of 40k SFRH4 9625/9725cs for 9-9.5; settled yesterday at 7.75 vs 9496.5; as market broke he lowered the strikes and bought 5k 9612.5/9712.5cs which settled 9.0.
–Another note on front calendars which ties into demand for puts on SFRM4: March’3/March’4 settled +2.5, but the next 1-yr, June’3/June’4 settled NEGATIVE 78 (9458.5/9536.5). It’s a new high, but if the front spread can go positive is it impossible for the next one to also do so? One might say that the Fed has successfully guided a sentiment change in the market: HIGHER for LONGER. Of course, that change in outlook doesn’t sit quite as well with equities and other long-dated assets.
–Eurozone inflation 8.5%. A Reuters headline captures the dilemma: ‘ECB confronts a cold reality: companies are cashing in on inflation.’ Of course, in the US cost-of-living adjustments to Social Security (up 8.7% in ’23 for 70 million people) has had the same inflation-reinforcing effect.
–Yesterday’s Mfg ISM was slightly weaker than expected at 47.7, but they didn’t like the Prices Paid component 51.3. Today’s news includes Jobless Claims expected 195k.
