Pre-set path… with a kicker
October 15, 2025
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–Yields continue to grind lower. TYZ5 settled 113-13, +8/32, with cash 10s 4.019%. USZ5 settled 118-09, +11/32 with 30s marked at 4.621%. SOFR contracts +0.5 to +1.5, with SFRZ6 and SFRH7 tied for peak contract at 9705 or 2.95%. Trade of the day was a new buyer of >100k 0QZ5 9800c (initial +80k on block for 1, then some slightly higher). These expire 12-Dec 2025, SFRZ6 underlying.
–November FF settled 9614.5 or 3.855%. Current Fed Eff is 4.10, so FFX is 24.5 lower in yield, fully pricing a 1/4% cut at the October FOMC. FFF6 settled 9640 or 3.60%, exactly 50 bps below current Fed Effective (good size buyer yesterday at 9640.5). Central banks like to say they’re not on a “pre-set path”, but the short-rate futures markets have clearly set the next two meetings for 25 bp cuts.
–However, the FF target isn’t the only Fed tool, as Powell said yesterday. From the speech:
Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision.
The end of balance sheet run-off reflects slightly easier stance; perhaps the gold market is taking that factor into account as it soars to new record highs. Currently 4223/oz, up 59.60 as of early morning Wednesday.
Also from the speech:
Research and experience tell us that asset purchases affect the economy through expectations regarding the future size and duration of our balance sheet.
–Stopping asset sales will have a similar effect, of course. The market is priced for FF cuts already; the end of balance sheet run-off will be an additonal ease.
–I had mentioned 0QZ 9800c in my weekend note. Currently 0QZ5 9750c are 3.75 (ref 9705), so an immediate 50 bps surge in SFRZ6 would see the 9800c go from 1 to at least 3.5 and likely ~ 5.5 given a vol kick. I had also mentioned 0QX5 9737.5c for 3.0, those settled 2.5 yesterday. Both the SVB bankruptcy in March/Apr 2023 and the yen-carry turmoil of Aug 2024 saw rallies > 50 bps in the first red in short order. Something comes out of left field almost EVERY day now. A little insurance isn’t a bad idea.
