EURIBOR OPTIONS: Decent Call Fly buyer

Today’s modest OAT outperformance looks to be a continuation of cautious 2026 budget optimism. Focus remains on tomorrow’s crucial National Assembly vote on the Social Security Financing Bill (PLFSS). If the PLFSS is passed, it would remove another hurdle to passing the overall budget before year-end. Increased confidence in an agreement on the 2026 budget would pave the way for the 10-year OAT/Bund to test and push through the 70bp figure. Intraday, the spread is 1bp narrower at 71.5bps, compared to a 0.5bp widening in the BTP/Bund spread.

• A reminder that on Friday, the National Assembly voted in favour of the revenue section of the PLFSS. However, this was helped by numerous absences in the National Assembly.
• There remains uncertainty around the voting intentions of the conservative Les Républicains, the centre-right Horizons and Green parties ahead of tomorrow’s vote.
• One positive is that centre-left Socialist Party First Secretary Olivier Faure instructed his lawmakers this morning to back the PLFSS.
• The vote is due to get underway at ~15:00CET (09:00ET, 14:00GMT) tomorrow. If the bill passes, it will return to the Senate, where there is the prospect of debate being shortened via a “preliminary question”.

SOFR futures have softened in early trade this week, with cross-market inputs (hawkish ECB communique) allowing the weakness seen in early December to extend a little further.

• Goldman Sachs reaffirmed their preference for longer dated curve steepeners (such as SFRZ6/Z7) late on Friday.
• Ahead of this week’s Fed meeting they noted that “the upcoming change in Fed leadership and uncertainty around the composition of the committee could mean that terminal rate pricing proves less sensitive to any changes in the dots than usual”.
• Looking slightly further out they highlighted that “with just 22bp cumulatively priced for the first 3 meetings next year and 3 months of labor market data due before the January meeting, we continue to think risks lean marginally towards further pull-forward in cut pricing on larger-than-expected jumps in the unemployment rate. But with risks beyond the very near-term becoming more two-way given expected growth pick up next year, we stick with our preference for steepening expressions”.

FRBNY EFFR for prior session:

• Daily Effective Fed Funds Rate: 3.89% (+0.00), volume: $88B
• Daily Overnight Bank Funding Rate: 3.89% (+0.00), volume: $167B

Earlier Repo Reference Rates

• Secured Overnight Financing Rate (SOFR): 3.93% (+0.01), volume: $3.221T
• Broad General Collateral Rate (BGCR): 3.90% (+0.03), volume: $1.321T
• Tri-Party General Collateral Rate (TCR): 3.90% (+0.03), volume: $1.295T
• (rate, volume levels reflect prior session)