They still like April TY puts
February 21, 2024
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–Light volume Tuesday with yields edging a bit lower. Tens fell 2 bps (from Friday’s level) to 4.273%. Red SOFR pack strongest on the strip settling up 5 at avg price 9616. As March treasury options expire on Friday, focus has shifted to April options, primarily puts, which in turn has accelerated the roll in TY. About 6% of open interest has shifted to TYM4 with shorter durations having rolled about 4%. DV01 on TYM4 is over 5% larger than TYH4 which is also a likely factor in spurring the roll. Buyer yesterday of another 20k TYJ 106.5p which settled 5 with -0.06d, open interest up 18.5k (adding). Market makers selling April puts need deltas in TYM4 to be properly hedged.
–On the shorter end, buyer of about 35k SFRU4 9500p for 16 to 16.5 covered 9531 to 31.5. Settled 16.75 vs SFRU4 9529 with open interest up 19k. In terms of ease timing, FFN4 settled 9493.0 or 5.07%. Current EFFR is 5.33% or 9467, which is exactly where FFG4 is pegged. One cut would move EFFR to 5.08% or 9492. The next FOMC meetings are March 20, May 1 and June 12. FFK4 still prices for some chance of an ease at the May 1 meeting settling at 9476.5. However, July is the nearest contract which fully reflects one 25 bp cut.
–On my weekend note I compared the May through Sept sell-off in SFRM4 with current price action in SFRH5 and suggested if the pattern holds and the Fed stands pat, then put plays on SFRH5 make sense. Someone had a similar thought and bought 9k H5 9625/9562.5/9500p fly which settled 13 ref 9590. Obviously the price target isn’t as low as the SFRM4 price, but a stingy Fed should see H5 grind lower on the roll.
–Today brings $16 billion of 20s to be auctioned, followed by FOMC minutes. NVDA reports after the close (Astonishing $1.7t market cap). There are indications that NQH4 has rolled over, but this afternoon will be important for near term direction.
