Stripping out an ease
September 26, 2025
*********************
–In a simplistic sense, pre-FOMC the Fed Effective Rate (EFFR) was 4.33%. If the Fed cut 25 bps each in Sept, Oct and Dec, that would be a cumulative 75 bps, equating to EFFR of 3.58 or a price of 9642.0. The high in SFRZ5 on Sept 17, Fed Day, was 9642.0. Right there. Yesterday SFRZ5 settled 9626.0 as data remains solid (upward revision of Q2 GDP, lower Jobless Claims, etc). SFRH6 traded as high as 9667.5 on Sept 17, a spread of 1/4% to the December contract high. However, yesterday, SFRH6 settled 9643.0. Essentially the market is stripping out an ease which had been priced going into the FOMC.
–New high in SFRZ5/Z6 one-year calendar at -60 (9626, -5.5/9686, -8.5). From mid-July to early Sept, the (then front) SFRU5/SFRU6 spread was -90 to -105. Of course, one ease in that period, last week’s, actually occurred.
–New lows in some of the far SOFR calendars as the curve flattened due to signs of a less accommodative Fed. For example, SFRZ7/SFRZ8 settled +17 (9679/9662) from a recent high of 24. Similarly, 5/30 treasury spread ended at 98.3, down 6.0 bps as weakness was concentrated on front end (recent high 123). 5y +5.3 to 3.767, 30y -0.8 to 4.75. Tens rose 2.7 bps to 4.172%.
–Relentless buying of TYZ5 calls. Yesterday added 120k buys of 113.5c vs futures. TYZ5 113.5c settled 32 with 32d vs 112-205. TYZ 114c (long 175k) settled 24 with 25d. Details at bottom.
–Catalysts for wild moves are bubbling everywhere. Threats of downing jets, a gov’t shutdown showdown where the admin is threatening massive layoffs, the Pentagon stripping layers of high-level management. Cats sleeping with dogs.
–The panic isn’t evident in VIX though it has firmed somewhat to 16.75.
–KMX (CarMax) absolutely crushed, down around 19% yesterday. BBG cites “Used car stress” on the earnings call. WSJ says ‘Auto Industry is Flashing a Warning Sign’. TriColor bankruptcy, Ford offering incentives on F150 to lure less credit-worthy borrowers. Subprime auto delinquency rates punching higher.
–News today includes PCE Prices, expected 0.3 with Core 0.2. Year/year expected 2.7 from 2.6 and Core 2.9 from 2.9.
Summary of TY covered call buyer.
This morning (Thursday):
+50k TYZ5 113.5c covered 112-215, 35d price 38
+50k TYZ5 113.5c covered 112-210, 35d price 38
and later in session:
+20k TYZ5 113.5c covered 112-090, 18d (only) price 32
Tuesday:
+50k TYZ5 114.0c covered 112-250, 29d price 31
Monday:
+50k TYZ5 114.0c covered 112-275, 31d price 33
+50k TYZ5 114.0c covered 112-255, 29d price 32
+25k TYZ5 114.0c covered 112-240, 28d price 31
post futures-settlement
0QU6 9587.5p vs SFRU6 9684, 14d, 6.5 paid 40k…nearly 100 bps otm. 351 dte
