back of the cocktail napkin figuring…
October 31, 2025
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–Continued follow-thru pressure on rate futures from Powell’s comments Wednesday that an ease in Dec is not a forgone conclusion. Weakest SOFR contracts were down 4: both SFRH6 at 9642 and the peak SFRH7 at 9689. On 17-Oct SFRH7 traded as high as 9717.0 or 2.83%. As of yesterday, this peak SOFR contract is 3.11%. Many option trades appear to have been predicated on a Fed Fund ‘terminal rate’ closer to 2%, but longer term resistance seems to have capped reds at or just under 3%. Two-yr yield rose 3 bps to 3.61% and tens up 4 bps to 4.093%. With Wednesday’s cut there’s significant positive carry in 10s. My thesis has been that EFFR (Fed Funds Effective Rate) recently acted as a magnet for the 10y yield, new EFFR should be 3.87. Open interest fell in TU, FV and TY futures with the latter -61k, suggesting long liquidation.
–Notable new trade that’s fading the weakness: buyer of 75k 0QZ5 9700/9725cs for 4.75 to 5.0. Settled 4.5 vs 9687.5 in SFRZ6. Expires 12-Dec. Even if the Fed does NOT ease at the 10-Dec FOMC, this trade could play out. With NO ease, SFRZ5 would probably gravitate around 9612. Prior to option expiration in September 2025, the SFRU5/SFRU6 one-year calendar was slightly below -100. If the same type of price action developed, that would mean SFRZ6 above the 9700 strike.
–An exit trade in midcurves: -50k 2QH6 9800/9825cs at 0.25. Seems worth owning just in case…can’t go sub-zero! Stocks were sloppy yesterday but seemed to resolve to the downside, however, AAPL and AMZN posted great results and have taken ESZ higher this morning.
–I haven’t been following this, but with gold becoming the lynchpin of the new world order, I thought I’d check the one-year GC spread. GCZ5 4015.90s, GCZ6 4195.60s a spread of 179.70 or 4.5% for the year. Seems reasonable to cover interest insurance and storage. Mason jars for the back yard, though have to feed the dog for a year to keep out intruders. He’s good at it
