There Will Be Easing
June 25, 2025
***************
–Buy America day as Israel/Iran ceasefire appears to be holding. SPX up 1.1%. Ten-year yield down 3.5 bps. Oil lower.
–Near SOFR calendars made new lows as Powell fielded questions and soliloquies from Congress. He said that rates were modestly, not moderately, restrictive. SOFR contracts from March’26 to March’30 were up 3 to 3.5 bps. The market continues to build easing into forward rates. SFRU5/SFRU6 one-yr calendar made a new low -88.5 (9595.5/9684.0) -3.0 on the day. SFRU5/SFRZ5 3-mo calendar also at a new recent low -29.5 (9595.5/9625.0). So that 3m calendar roughly signals more than one-ease, and the December price, which equates to 3.75%, is 50 bps lower than the bottom of current FF target (4.25 to 4.50%). I’ve noted previously that the Fed Effective rate of 4.33% seems to be an anchor for the 10y treasury, which closed 4.289% yesterday.
–In terms of an immediate ease, that is, one month from now on July 30, August FF showed no change in odds at around 20%, settling -0.5 at 9572.0. Current EFFR is 4.33 or 9567.
–Ed Bolingbroke of Bloomberg and Kevin Muir, Macro Tourist, yesterday highlighted the idea of forward spreads reflecting an easier Fed post-Powell (perhaps to modestly stimulative??). Below is a graph of SFRH6 (which covers the 3m period from mid-March to mid-June, just before Powell’s term ends), to SFRU6 which will give the new Chair the chance to get his feet wet with a couple of cuts. At the end of March, the spread was -8, (9649.5/9657.5). At yesterday’s settle it was -34.5 (9649.6/9684.0). That’s a change just about equal to one 25 bp move. An early buyer yesterday of 30k 0QU5 9725/9750cs for 3.5 reflects the same idea…forward easing of a magnitude greater than the market currently expects. Call spread settled 3.75 vs underlying SFRU6 9684.0. Lower strike is, of course, 2.75%.
