The Price is Right
September 7, 2025 – Weekly comment
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Payrolls were weaker than expected, though better than the worst fears, at +22k. The unemployment rate hit a cycle high of 4.3%. The last time the rate was here was in late 2021, before the hiking cycle began. I don’t feel the data were weak enough to justify a 50 bp cut at next week’s meeting, and neither does the SOFR curve, but risk management is forcing the market to assign small odds to that outcome.
FFV5 (Oct Fed Funds) settled 9596.0 or 4.04%, 29 bps below the current Fed Effective of 4.33%. If the Fed were to cut 25 at next week’s meeting (9592 or 4.08%) and another 25 on October 29, EFFR would be 3.83% or 9617.0. FFX5 (November Fed Funds) settled 9614.0, rather near the two-cut level. A total of 75 bps in cuts by year-end (last FOMC of the year is 10-Dec) would be 3.58% or a price of 9642.0. January’26 FF contract settled 9638.0, just four bps away. On the week, FFF6 ended up 13.5 bps. In other words, even before soft employment data, the three-cut scenario was given substantial odds, and current pricing appears quite comfortable with that outcome.
Of perhaps greater interest than the next few months/meetings, is forward pricing. I had noted during the week that even though treasury yield curve spreads remained firm and near the year’s highs, that the red SOFR pack to deferred contracts was actually edging lower (calendar spreads). When the market expects aggressive easing, reds typically strongly outperform to the upside. Didn’t happen this week.
The above chart is the rolling red SOFR pack. While it settled at a new high for this calendar year at 9709.75, it’s not quite thru the Sept 2024 high of 9719.5, which was made 9/10/24. That was just before the first cut had occurred, so the forward rate in Sept ’24 was more than 2.5% lower than the FF midpt of 5.375%. Currently, the FF midpoint is 4.375%, so Red Pack is a much more reasonably priced 1.5% lower, and likely not all that far away from the neutral rate. Interestingly, 2/10 treasury spread ended lower on the week, as did 5/30, both by just under 3 bps at 57.7 and 119. Red/Gold SOFR pack spread eased by 5.625 bps to settle at 51.0. In other words, Friday’s data did NOT spark a panic easing bid. Another indicator is the MOVE index, which rallied impressively from 79.39 the previous Friday to 89.67 on Thursday, but ended at 85.29.
The ten year yield finished the week at 4.086% (ref TYZ5 settle 113-125). That yield was down 14.2 bps on the week, essentially knotted-up to what will very likely be the new EFFR of 4.08%. 10/30 treasury spread ended at 68.7 (ref USZ5 settle 116-14), just a little off the year’s high which was set in the previous week at 69.7.
From this week’s title and examples of post-NFP pricing, one might conclude there’s not much left to do besides sell premium and collect decay as prices languish around ‘fair value’ in US rates. While that might be an appropriate strategy, there are still many geopolitical and economic events that could shake things up. For example, Japanese PM Ishiba stepped down over the weekend. Political and budget turmoil in France has led to Monday’s Confidence vote, which Bayrou is expected to lose. Russian forces hit government buildings in Kyiv.
In the US, data include PPI on Wednesday and CPI Thursday. CPI yoy expected 2.9% from 2.7% with Core 3.1 from 3.1. Prelim UofM data on Friday. Auctions are also on tap this week, with $58b of 3s on Tuesday, $39b 10s on Wednesday and $22b 30s on Thursday.
OTHER THOUGHTS/ TRADES
Large buys of Oct TU calls on Wednesday with the 2y yield around ~3.61 proved prescient, with 2s ending Friday at 3.507%. Trades were:
TUV5 104.500c 6.5 /+16k
TUV5 104.625c 4.5 to 5 /+16k
TUV5 104.750c 3.5 to 4 /+43k
Friday’s settles ref 104-153 were 10.5, 7.5 and 5.5 with no signs of exit in the calls, though perhaps there were some delta-hedging futures sales.
SFRU5 options expire Friday. A huge amount of open interest will vanish: SFRU5 calls still have 5.7 million open, though 54k positions fell off the board on Friday. SFRU5 settled 9598.75. U5 9600c settled 2.0, 9606.25c 1.0 and 9612.5c 0.5. I am still expecting final settle to be close to the 9606.25 strike.
Mentioned last week: As a targeted upside play, TYV 113.5/114/114.5/115 c condor settled 4/64’s ref 112-16. Settled 7 vs 113-125 with good potential to target the sweet spot just above the 114 strike.
In the early April Liberation Day turmoil, the front TY contract high was 114-10. The low 10y yield associated with that month posted the low of the year at 3.997%.
| 8/29/2025 | 9/5/2025 | chg | ||
| UST 2Y | 362.1 | 350.7 | -11.4 | |
| UST 5Y | 369.9 | 358.2 | -11.7 | |
| UST 10Y | 422.6 | 408.4 | -14.2 | wi 408.6 |
| UST 30Y | 491.5 | 477.1 | -14.4 | wi 477.4 |
| GERM 2Y | 193.7 | 192.7 | -1.0 | |
| GERM 10Y | 272.3 | 266.1 | -6.2 | |
| JPN 20Y | 260.1 | 264.3 | 4.2 | |
| CHINA 10Y | 178.0 | 177.0 | -1.0 | |
| SOFR U5/U6 | -103.0 | -105.25 | -2.25 | |
| SOFR U6/U7 | -6.5 | -3.5 | 3.0 | |
| SOFR U7/U8 | 23.5 | 20.5 | -3.0 | |
| EUR | 116.86 | 117.17 | 0.31 | |
| CRUDE (CLV5) | 64.01 | 61.87 | -2.14 | |
| SPX | 6460.26 | 6481.50 | 21.24 | 0.3% |
| VIX | 15.36 | 15.18 | -0.18 | |
| MOVE | 79.39 | 85.29 | 5.90 | |
