Rolling calendar spreads
July 21, 2025
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–Friday featured a decline in yields (continuing this morning) with a steeper curve. New low in a couple of near 1-yr SOFR calendars, for example SFRZ5/Z6 became more inverted by 2.5 to a new low -71.0 (9610/9681). SFRH6/H7 eased 2 bps to a new low -46.0. The peak quarterly SOFR contract has slipped back one slot to SFRH7 at 9681.5, consistent with the idea of a ‘terminal rate’ of 3.0-3.25%. 2yr yield fell 4.2 bps to 3.873% while tens were down 3.6 bps yo 4.429%. 30y was only down by 1.6 to 4.999%. 5/30 treasury spread ended at a new high of 104.
–Not much reaction to Japan’s elections though yen has firmed as LDP’s loss in the upper house appears to have been priced in. US interest rates are lower this morning going into a week with a light economic calendar and Fed blackout. Leading Index today expected -0.3 from -0.1. Ten year yield this morning is 4.38%, down nearly 5 bps from Friday. Current Fed Effective rate has acted as a magnet for the 10y, EFFR is 4.33%. SFRZ5/SFRZ6 is printing a new low at -73.0 this morning. This spread has steadily trended lower since January. Just prior to Inauguration Day on 14-Jan it settled +11.0, so a move of 84 bps since then, with the largest countermove being 13.5 bps. SFRU5/U6 is printing -93.5 this morning (9584.5/9678.0). FFQ5 is 9568 (pegging the current EFFR of 4.33) while FFQ6 is 9671.0, just over 100 bps lower in yield. The near 1-yr spreads have pretty consistently gravitated around 1% inversion: rate eases continue to be expected, but they’re pushed forward in time. A Powell ‘pink slip’ could change that, but for now, trends are solidly in place.
–So, given that the end of Powell’s term is in May, essentially at the end of the SFRH6 contract, and given that a new Fed Chair is ‘expected’ to slash rates, doesn’t it make sense for SFRH6/H7 to rapidly roll closer to Z5/Z6? Somewhat interesting that SFRH6/U6, the six month calendar in the beginning of H6/H7 is -40, while U6/H7 is just -7.5. (9638/9678/9685.5). Front loaded easing of the new Chair is being priced, but somewhat tentativeley.
