Fed Funds Futures vs. SOFR Futures Spreads Catching Traders Attention

Below average session volume
Volatility little changed
Pit volume outpaces screen volume by a factor of 2.
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: September 30, 2019
 

Very quiet overnight session, only 10K options volume prior to pit open. Futures traded near their session lows prior to a weak Chicago PMI number that rallied us to the top of our day range, where we ended the session.

Big Trades
 

EDH0 98.875/99.125 call spread 1x2, paying 1 for the 2 legs on 12.5K (see note)

EDH1/EDU1 99.50/99.75/99.875 call tree double (or stupid), paying 2.5 on 10K

EDM0 98.625/99.00 call spread vs 98.00 put, paying 3.5 for the call spread on 10K

 

Things to Watch in Interest Rate Futures
 

#1 We have seen a lot of trades go through in the Fed Funds vs 1 Month SOFR spreads.


Source: Quikstrike

This all started when SOFR surged unexpectedly. Since then, it seems that there are almost daily block trades in the Q4 expirations (Oct, Nov, Dec). Today we saw 5,400 Oct spreads (ZQV9 v SR1V9) trade at -5. Open interest the Oct, Nov, and Dec 1 month SOFR futures has increased 162%, 183%, and 106%, respectively, since the beginning of the month. It looks like most trades are buying SOFR and selling Fed Funds, trying to capture the mean reversion of those overnight rates. With the year-end fast approaching, don’t be surprised to see even more of these trades.

 

#2 Paper has been a big buyer of the 98.875 calls in March (EDH0). Prior to today’s 98.875/99.125 call spread 1x2, they had bought about 100K of the 98.875/99.125 call spreads (1 to 1) and an equal amount of the 98.875/99.25 call spreads as well. The net position would resemble a ratioed call tree. Not sure if these are hedges against something else, perhaps OTC, but 50+ ticks over the next 6 months seems like a stretch, especially if we see a potential contraction in the FRA/OIS after the year-end turn.

#3 What a slow day! When I walked onto the floor, the overnight volume was a paltry 10K. It’s been a long while since I have seen volume that low. 100K had become the norm, with 250K+ receiving a raised eyebrow. The Rosh Hashanah holiday obviously played some role, but over the past couple of weeks, volumes have seemed more like summer markets rather than the end of Q3, beginning of Q4 markets. Not sure what the catalyst will be the defibrillator for the markets, but it seems as if market participants are exhausted and catching their breath. Lots of numbers coming this week and plenty of political fodder to digest could be the fuel this market needs.

About the Author

Albert Marquez works for Chicago Capital Markets (CCM) and covers Eurodollar & Treasury Options and Futures. Albert can be reached  on Twitter @STIR_Report or amarquez@ccmmarkets.com