SOFR contracts indicate nagging concerns of stronger growth and higher inflation?
January 7, 2026
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–Early yesterday morning Fed Governor Miran suggested the Fed may have to ease by more than 100 bps this year. However, by day’s end the SOFR curve had flattened with SFRH6 down 2 bps to 9646.5 and M6 down 3 bps to 9667.0 while more deferred contracts were -0.5 to unch’d. The lowest contract, SFRH6 at 9646.5 vs the peak contract, Z6 at 9688.0 only has a spread of -41.5. Current Fed Effective is 3.64 with Monday’s SOFR RATE 3.70. End of year rate expressed by SFRZ6 is 3.12%. Even with the prospect of a new Fed Chair, the market just isn’t embracing the idea of another 100 worth of rate cuts. To get a sense of yesterday’s flattener: H6 -2 9646.5, H7 -2 9688, H8 -0.5 9668 and H9 unch’d 9646.5. So H6 and H9 are the exact same price. In treasuries, 10y yield rose 1.2 bps to 4.175%. TYH6 settled 112-105, -3/32. TYH6 112.5^ continues to reflect falling vol at 1’21 (4.2) new recent low.
–Large trade yesterday was an exit sale of 200k FFF6 at 9636.5. As mentioned yesterday, odds of an ease at the Jan 28 meeting are less than 20%. If EFFR remains at 3.64 and the Fed eases on Jan 28, the new EFFR should be 3.39, and the final Jan settle would be 96.384 (28 days at 3.64 and 3 days at 3.39). No ease means 96.36. Of course, there’s a risk that a setting of 3.65 could occur….
–It’s not uncommon to see some high gamma put buys in front of employment data, but not typically in US, more like 5s or 10s. However, yesterday a new buyer of 12k each US wk2 114.5p for 16-17 and 114.0p for 6 to 7. Settled 14 and 7 ref 115-05. These options expire Friday, on unemployment day. Also a new buyer of 80k TYG6 117.25c for c-7. (He must be expecting the Greenlanders to mount stiff resistance, sparking an extraordinary bid for safety…)
–Today, ADP weekly +50k expected vs -32k last. ISM Services 52.2 from 52.6. JOLTS 7600 vs 7670 last.
