SOFR calendars, el Risitas
July 22, 2025
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–Yields fell Monday, stocks made new highs early and gold soared, almost as if a new wave of liquidity is ready to wash over markets. Ten year yield fell almost 6 bps to 4.37%. Near 1-yr SOFR calendars made new lows. For example, SFRU5/U6 fell 4 to -95 (9583, -0.5, 9678, +3.5). SFRZ5/Z6 also down 4 to -75 (9610.5, +0.5, 9685.5, +4.5).
–Anyone who has watched euro$ and then SOFR calendar spreads over time knows that, on occasion, these spreads indicate near certainty of when Fed action is likely to occur (not always right). I was chatting with a friend yesterday on this topic and the official end of Powell’s term, and I sent this (modified a bit this morning with actual settles):
SFRU5 9583 or 4.17. 16 lower than EFFR…so they’re tentatively pricing odds of easing
SFRZ5 9610.5 or 3.895. U5/Z5 spread -27.5. So there IS an ease priced there as the spread is around ¼ pct
SFRH6 9637 or 3.63 Z5/H6 spread is-26.5. Again, an ease
SFRM6 9662 or 3.38 H6/M6 spread is -25.0….NOW, we might think that spread should be -35 or even more inverted if NEW FED starts easing right then!
SFRU6 9678 or 3.22 M6/U6 spread is -16.0. What? Not much more chance of ease????
SFRZ6 9685.5 or 3.145 U6/Z6 spread is only -7.5…. Z6 and H7 are PEAK on SOFR curve….represents a LOOSE idea of terminal rate 3.0/3.25
After that the SOFR contracts start to steepen. WHY? Perhaps end of easing, perhaps worries about prospective easing leading to increased inflation expectations.
I mentioned yesterday that SFRH6/H7 1-yr spread was mostly front-loaded. That is, the first six months, H6/U6 is -41 (9637/9678) while the next six month spd is -8.5 (9678/9686.5). That first six-mo spread brackets Powell’s end and someone else’s beginning. Trump’s looking for 300 bps, this spread indicates 41. And the peak SOFR contract is compatible with a FF target 3.0-3.25%, 125 bps lower than right now. Look, SFRU5/SFRU6 is -95, around 100 bps of possible cuts. But SFRU6 and SFRU7 are the SAME price 9678.0 The spread is ZERO. This isn’t exactly a professional interpretation, but the layman, might say: the market is expecting relatively modest eases over the next year and then NOTHING. Put another way, Bessent in a private meeting might be saying, “Mr President, the market is calling bullshit on your call for big rate cuts.”
Upcoming calendar might be of interest:
FOMC July 30
NFP August 1
JAX HOLE August 21-23 (Labor Mkts in Transition)
FOMC Sept 17
In 2020 we have to cut a bit of slack because covid made people crazy. I didn’t spend much time on this so I hope I have the timeline right:
Jackson Hole Conference was August 22-24. The Fed released the ill-fated FAIT (avg inflation targeting) on August 27. Right before inflation EXPLODED. If you’ve ever seen the Laughing Spaniard (El Risitas) dubbed interview, this could be a new one: Spaniard with serious face Powell says, “we’re going to let inflation modestly run above 2%” then, breaking into hysterical laughter, in 2021 CPI was 7%. Harder laughter, SEVEN PERCENT! and in 2022 it was EIGHT PERCENT. The new FED FIVE-YEAR framework review will be released THIS YEAR.
In 2020, JAX HOLE Aug 22-24
FED FRAMEWORK statement AUG 27, 2020 (Avg inflation targeting)
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm
