Selling pressure on SOFR contracts likely drawing to an end
March 12, 2026
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–Pressure on interest rate futures has been relentless since the hostilities against Iran started. SFRU7 is peak contract on the SOFR strip; the 3/2 high was 9711.5 and yesterday’s (new) low was 9672, a total range of 39.5. The ten year treasury yield (closes only, not extremes) has gone from 3.941 to 4.211 or 27 bps. Going into March SOFR option expiration, SFRH6 settled 9632.75, while SFRZ6 is 9661, a spread of just -28.25, or around one 25 bp ease being priced into year-end. Yesterday’s CPI was a non-event, as expected yoy 2.4% with Core +2.5%.
–Iran escalated attacks on tankers, causing CLK6 to surge over 90 again this morning (now 90.30, +4.23). It’s often said that Trump operates without any long term plan, but Iran’s whole strategy seems to be to knock out energy infrastructure to bring the west to its knees. In my opinion, that’s a flimsy and desperate stance. Long term chance of success is zero. This morning Trump said the US may restrict exports.
–Other news snippets: Morgan Stanley gating a private credit fund. FBI warns CA of possible Iranian drone attacks. Financial stress in Private Credit/Equity was apparent before Iran and is likely to continue. The question is whether the labor market continues to deteriorate.
–A couple of technical notes of interest: 10y breakeven (treasury minus tip) edged to a new high 238.2 bps, so those who are convinced of another inflationary surge can point to this metric (however, from last May forward the range has been 224 to 246, so the signal is weak at best. Of more interest, red sofr contracts (currently year 2027) to more deferred contracts made new lows on spread yesterday. For example, red pack to gold pack (2nd to 5th year) settled 36.25, down 4 bps (9671.125/9634.875). Makes sense: the market has squeezed out forward easing expectations. However, 2/10 spread rose 0.4 bps to 57.2 (3.632, +6.5 and 4.204, +7.0). Perhaps longer end weakness is tied to yesterday’s 10y auction (with 30s today).
–I’ve attached a chart of 2/10 vs red/gold. Perhaps the relative moves are just a function of the ten year swap spread falling from -35 in Jan to -46 now. However, there is evidence of long SOFR option exits. As an example, SFRU6 9700/9750/9775c fly at 2.5. Not a big trade, and not much delta, but other exit trades occurred as well. (I’d be a buyer of the Sept broken fly NOT A RECOMMENDATION).
