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The end of the month. Fed Funds Rate decision looms for the market. 'The Employment Situation' is set to be released Friday. What is it to be? Will encouraging indications of inflation tapering cause the Fed to stick to its game plan of a 25 basis point hike? December's soft Inflation data has raised expectations for the Fed to slow its hawkish roll. December's FOMC meeting saw a 25 basis point drop from an increase of 75 in Nov. to an increase of 50 in Dec. The market is betting that the Fed will reach its terminal rate around June 2023 STIR option expirations. With the Fed hinting at June terminal rates, futures traders have softened their stance and have begun positioning for this peak. SOFR March and June futures are currently trading 95.165 & 95.105 respectively indicating the market is pricing in a 25 basis point hike on its Feb 1 meeting. CME's FedWatch tool appears to agree. The probability that the Fed will raise its target FF rate by a quarter to 450 - 475 basis points is 99.4% with an 0 basis point hike constituting the remaining .6%. It seems that consensus appears to completely rule out a 50 basis point hike indicating all hawkish sentiment has left the building. How have STIR traders been positioning themselves the last few weeks?
Upside Risk:
SFRJ3 95.25/95.375 call spread BOUGHT 90K as:
+ 2 on 75K
+ 2.15 synthetically on 5K
+ 2.5 on 10K
SFRZ3 98.00/98.50 call spread + 1.5 on 100K
SFRZ3 97.50/98.50 call spread + 2.25 up to + 3.75 on 50K
SFRN3 95.625/95.875 call spread + 3.5 on 20K
Short Vol Structures:
SFRJ3 95.1875/95.125/95.00/94.875 put condor vs SFRJ3 95.3125/95.4375 call spread BOUGHT 150K +condor as:
+.25 on 70K +.5 on 40K
+.75 on 40K
SFRZ3 95.625 straddle SOLD 50K from 82 down to 69.5
SFRJ3 95.0625/95.125/95.25/95.375 call condor vs SFRJ3 94.9375/94.875 put spread paid between +.5, +.75, and +1 on 160K ALL DAY, +condor
SFRF3 95.125/95.1875/95.25 call fly BOUGHT 50K as:
SFRJ3 95.25/95.00/94.875/94.625 put condor BOUGHT 50K as:
LIBOR to SOFR:
Daily SOFR options volumes have been consistently averaging from 1.75-2 MM trades per day through all CME venues. The sun is setting on Eurodollars and LIBOR's dominance in short term interest rate contract derivatives. All Eurodollar positions will convert to SOFR on April 14, 2023 based on a 26.161 basis point conversion rate. With consistently elevated options volumes coupled with a higher interest rate environment, the dawn for SOFR based derivatives is upon us.
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