SOFR butterflies and pricing
August 13, 2025
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–CPI about as expected, with yoy 2.7 vs 2.8 exp and Core a bit higher at 3.1. Short end breathed a sigh of relief and greenlit an ease (which had already been substantially priced). SFRH6 and M6 were strongest contracts, both +3.5 to 9649.5 and 9670.5. With EFFR at 4.33 or 9567, SFRM6 is about 100 bps lower in yield. FFV5 settled 9591.5 (24.5 lower than EFFR) so one cut is completely priced. The FOMC after Sept is October 29, so FFV5/FFX5 spread gives a decent market expectation of ease at THAT meeting. Spd settled -15 or around 60% chance of 25.
–There is continuous buying of SFRU5 9612.5/9625cs for 1.375 to 1.5. That trade needs strong perception of a 50 bp ease at the Sept meeting (Bessent at end of day called for 50, maybe HE’S the buyer!). Block trade seller of 45k SFRV5 9618.75/9643.75cs at 10; more than doubled his money, having paid 4.5 for 60k on July 28. SFRU5 open interest was +26k to 1.29m. 9612.5c have 532k open, +77k yesterday.
–So with the front end frothy and inflation as expected but still not near target, long end yields rose. 30y cash 4.884%, +4.4 bps and appears as if 5% is in the cards once again. 2y yield was -2.3 at 3.729% or 60 under EFFR. 5/30 posted a new high (at time of futures settlement) at 106.2.
–ESU5 made an all-time-high. BLS unemployment data caused a bearish weekly reversal, BLS inflation data reversed it. Didn’t check this but saw a post noting that just MSFT and NVDA combined are 15% of total market cap.
–This next part’s not for everyone, but I find it interesting that there are some decent size SOFR butterflies trading again. Yesterday: Seller 40k SFRZ6/M7/Z7 6m butterlfy at -9. Was -10.5/-10 late. Settles: 9690.5/9689/9677, so first spread is 1.5 and M7/Z7 is 12 (-10.5 in fly). My first thought was that we’re back to the Euro$ technique of selling Dec contracts, and as I noted previously Dec 31, 2027 is a Friday so it’s a long year-end ‘turn’. This was a new trade, open interest in the 3 contracts +45k, +114k, +60k. Total SFR OI futures +353k.
–I’ve attached a BBG 6 month calendar spread matrix here.
In an environment of expected HARD easing in the near future, near SOFR calendars sell off, but deferred spreads rise. It’s apparent in the table of 6month spreads: U5/H6 is the lowest at -55.5, but by the time of Z6/M7 we’re +1.0. So, the 6m spread in front of Z6/M7 is U6/H7 and that’s -7. Pretty large six month roll. U6/H7/U7 fly is -15 Again, the sale of Z6/M7/Z7 at -9 would seem to earn effortless carry on natural curve roll. However, even though the market doesn’t fully perceive it, we’re in an environment where the Fed COULD be a slave to sloppy and volatile economic conditions. We have the President calling for 300 bps of instant ease and Bessent asking for 50. Cuts MIGHT come rapidly, and if they do, the back end of the SOFR curve is going to steepen hard. Typically, when the market looks for outsized easing, the peak contract on the strip moves forward. But for now, it’s still in the seventh slot, SFRH7 at 9691.5. THIS IS NOT A RECOMMENDATION, but consider that SFRU6/U7 one-year calendar is only POSITIVE 1 (9684.5/9683.5) while 6m M7/Z7 is +11 at settle (9689/9677). This is now all about the speed and magnitude of easing, and IF it happens fast then it’s likely that a spread like U6/U7 will move to a much more positive value. (That’s why trades like buying 0QU calls vs 2QU calls have found favor…call for ideas and execution).
–Personal story: I am a long-suffering owner of TLRY (pot) stock. In the beginning of July, it was around 30 cents, yesterday it traded 1.20. Should be happy, right? Explosions in these little stocks isn’t particularly healthy in my opinion, but will take it for now. How about sell MSFT and NVDA and buy the S&P 490 for flat? Just kidding, but all sorts of valuations seem somewhat out of whack.
