New low settles in SOFR contracts
Sept 28, 2023
–Rate futures continue to trade extremely weak, with most near SFR contracts closing at new low settles. For example, SFRU4 settled over 5% for the first time, at 9499 or 5.01%, down 6 on the day. To reach the current SFRZ3 price would require another 47.5 of roll-down. SFRU4 9500 straddle settled 95.0 with 352 days to go, breakevens near 4% and 6%. However, the 6% strike 9400 put settled 9.25 and the 4% strike 9600 call settled 22.5.
–There were a couple of new notable downside trades: a seller of 100k FFX3 at 9462.5 (settled 9461.5, open interest +71k), and a buyer of 45k SFRF4 9425/9400p 1×2 for 0.5 (settled there, 4.5, 2.0, vs SFRH4 9456.5). A hike on Nov 1 would obviously be an instant payout to the FFX seller as the contract would settle around 9443. There would need to be perceptions of another Fed move to 5.75-6.0% for the Jan 1×2. By the way, the March expiration 9425/9400p 1×2 settled at a credit of 0.75, 7.25/4.0.
–Nov Crude closed at a new high 93.68, up 3.29 on the day. Treasury yields also continue to rise, with the ten year yield up 6.4 bps to 4.624% and 30s up 3.3 bps to 4.73%. Implied vol firmed to a new high in US as shown on the attached chart, but it’s not quite breaking through old highs in TY. Somewhat interesting to note that on Friday, SFRZ3 9450 straddle settled 16.5 vs 9453, and yesterday against 9451.5 that straddle settled 19.5. Yesterday SFRZ3 9475c settled 3.5, which was up 0.75 on the day with the contract -1.5! Maybe it was the large FFX sale that re-focused traders on the idea that the Fed might not be done. Maybe it was Kashkari talking about one more hike. And maybe it’s just that the world seems a little unhinged and financial stress is piling up.
–Today we have revisions to GDP National Accounts. Jobless Claims and the 7 year auction. Goolsbee comments at 9. Powell has a town hall meeting with educators at 4. Tomorrow PCE prices yoy expected 3.5% from 3.3 last.
