Flattened
February 23, 2026
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–Curve flattened Friday as the Supreme Court ruled that President Trump exceeded the powers to impose tariffs under the emergency provisions of IEEPA. A lower court will now decide on whether refunds will have to be made. Stocks rallied, though the idea that trade uncertainty has lifted is a stretch. Trump has now raised global tariffs to 15%. PCE prices were higher than expected, with headline 2.9% vs 2.8 and Core 3.0 vs a survey of 2.9.
–Aggressive new lows in several of the near SOFR one-year calendars. While SFRH6/H7 did not quite settle at a new low (-56.75s, 9634.25/9691), the next three one-year spreads did: SFRM6/M7 at -42.0, SFRU6/U7 at -18.5 and SFRZ6/Z7 at -2.5. To give a sense of the magnitude of the move, two weeks ago on 6-Feb, M6/M7 was -23, so down 19 in two weeks. U6/U7 was +0.5 and Z6/Z7 was +13. These spreads represent a harsh re-pricing of future Fed eases in both size and time. SFRH6 at 9634.25 is now a higher yield than current EFFR of 3.64% (No ease in March or April). SFRM6 at 9650.5 is 3.495%, around the midpoint of ease/no ease even though that time period should correspond to the start of Warsh’s term. At the December SEP the Fed had projected an end-of-2026 FF target of 3.4% (one cut in 2026). SFRZ6 settled 9686 or 3.14%, so the futures contract still projects 2 cuts by year-end, but in a broader perspective, the market seems pretty comfortable with the idea of a 3% terminal rate.
–One side note, last week there was massive buying of SOFR calls, mostly the 9800 strike. As mentioned previously, SFRU6 9700c have the most Open Int of any SOFR call at 513k. However, SFRZ6 9800c have vaulted higher in OI on heavy buying, from 174k on 13-Feb to 410k Friday. Settled 5.25 vs 9686.
–In treasuries, flattening was also on display. 2/10 closed at a new low just below 61 bps. Two weeks prior on 6-Feb, it was near the cycle high at 71.3.
–Factory Orders and Durables today. NVDA reports Wednesday. OWL being circled by buzzards.
–Treasury calendars should be quite active. Current roll percentages and settles (all settles are at low of cycle):
TU 29% -4 7/8s at low of move given TUM6 has 13% higher duration
FV 32% -1.25s also at low
TY 21.3% +2.0s (1×1 spread made a new low; duration adjusted 10y also made a new low Friday)
UXY 36.2% +4.0s
US 20.5% +14.0s
WN 21.6% +10.0s
