Short end implosion
March 13, 2026
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–On Wednesday afternoon/Thursday morning I suggested that selling pressure on the US front end may have run its course. I was spectacularly wrong.
–SFRM7 was the weakest contract yesterday, down EIGHTEEN bps to settle 9652.5. From the early morning March 2 high of 9711.5 to yesterday’s low 9651.5 has been 60 bps. SFRZ6 now only has about half a cut priced in (settled 9646.5 or 3.535% relative to EFFR and SOFRRATE 3.64). Near one-year SOFR calendars made new highs as reds bore brunt of the selling. For example, a recent low in SFRM6/M7 was -52.5, it settled -16 yesterday up 12 bps!! Some trades are expressing the chance of rate HIKES. Imagine Warsh coming in and the first move is a rate increase! Next thing you know they’ll be saying crude oil prices can go negative!
–March SOFR options go off the board today, and June’26 will be in the front slot of the strip tomorrow. In the four years spanned by SFRM6 to SFRH0 the range of yesterday’s settles was 9636.5 (M7) to 9661.0 (H8), just 1/4%.
–Understandably implied vol exploded. Example, SFRH7 9650^ settled 72.5 vs 9648.5. On Wednesday, SFRH7 9662.5^ settled 66 vs 96.66.
Also consider these midcurve straddle settles: 0QU7 9662.5^ settled 67.0 vs 9657.5 while 2QU7 9662.5^ settled 58.5 vs 9657.0. A spread of maybe 3 or 3.5 is reasonable, 8.5 seems a bit crazy for same amount of days, same strike price, and underlying contracts only 0.5 bps apart.
–Treasury vol also exploded as uncertainty grips the market. On Wed FVJ6 109^ settled 0’44 vs 108-28 in FVM6. Yesterday the atm 108.5^ settled 0’55 ref 108-1325. Two weeks left in April treasury opts. Back of napkin calculation is about 19.5 bps for that straddle (DV01 is 44.20). 2QJ 9662.5^ settled 26.5 with 2 weeks more time value.
–This morning dollar index is making a new high 100.13 last, testing highs from last year in August, 100.26 and November 100.39. Big level with clear sailing to upside on a breakout.
–It’s all about the flow of oil, but there are some pieces of data today: PCE Price yoy 2.9 exp vs 2.9 last with Core 3.1 from 3.0. U of Mich Sentiment expected 54.8 vs last 56.6. The 2022 low was 50.0 and last year’s low 51.0. JOLTS expected 6750k from 6542k.
