US TSYS: Early SOFR/Treasury Option Roundup: Pre-FOMC Positioning, Dec SOFR Exp
Dec-09 12:59
FI desks reported modest two-way Treasury options overnight, SOFR derivatives focused on soon to expire Dec options (Friday) with some position adjustments ahead of Wed's FOMC policy annc, anticipating a hawkish cut. Yesterday's large 30k TYF6 112.75/113.5 call spds confirmed roll-down in strikes. Underlying Tsy futures narrowly mixed - inside overnight ranges, curves flatter (2s10s -1.045 at 57.679, 5s30s -0.737 at 104.646). Projected rate cut pricing near steady vs this morning's levels (*): Dec'25 at -24bp (-24.7bp), Jan'26 at -30.6bp (-31.4bp), Mar'26 at -37.5bp (-38.3bp), Apr'26 at -43.1bp (-44.4b).
- SOFR Options: Reminder Dec options expire Friday
- +4,600 SFRZ5 96.31/96.37 call spds, 0.25 ref 96.27
- +1,500 SFRZ5 96.18/96.25/96.31 call flys, 2.75
- -2,500 SFRZ5 96.12/96.25 put spds, 1.0
- +4,400 0QG6 97.00/97.12 call spds vs. 96.50 puts, 0.0 net ref 96.82
- -2,000 2QF6 96.25/96.50/96.75 put flys, 7.5
- +1,500 0QZ5 96.87 straddles, 10.0
- 2,000 0QZ5 96.75 puts
- Treasury Options:
- +2,600 TYG6 112.5/114 1x2 call spds, 14 vs. 112-11.5/0.10%
- +20,000 FVF6 109.25/109.75 call spds, 9.5 ref 109-02.5
- +10,000 TYG6 111/112 put spds vs. 114 calls, 6 net ref 112-10.5
- -3,500 TYH6 112.5 calls, 62 vs. 112-14.5/0.46%
- +5,000 wk2 TY 113 calls, 2 ref 112-11.5
- -4,800 wk2 TY 112/112.75 2x1 put spds, 17 ref 112-13.5/0.05%
- +2,300 wk2 TY 111.75 puts, 4 ref 112-11
- 2,000 USH6 115 puts, 2-0 ref 115-06
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FED: Fed Assets Pull Back, But Reserve Management Buys Eyed In 2026 (2/2)
Nov-07 21:58
Indeed NY's Williams has already begun pointing to potential for balance sheet re-expansion to begin again, with "reserve management" purchases intended to keep Fed liabilities rising in line with market demand:
- "Looking forward, the next step in our balance sheet strategy will be to assess when the level of reserves has reached ample. It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves as the Fed’s other liabilities grow and underlying demand for reserves increases over time. Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy."
- The prevailing consensus is that such reserve management purchases will begin by the end of Q1 2026 if not earlier, with t-bills bought and in amounts of up to $20B a month.
- Meanwhile in the final countdown to the end of QT on December 1, net SOMA runoff was around $4B in the last week, with a pace of around $20B overall over the last month.
- Takeup of the Fed's lending facilities pulled back in the week to Wednesday Nov 5, halving to just over $11B as month-end pressures abated. This was due almost entirely to a $10.2B drop in dealer repo operation takeup, the spike in which last week marked the highest since 2020.
FED: Reserves Tick Up Slightly In Latest Week, But Still Near "Ample" (1/2)
Nov-07 21:53
The Fed's latest H.4.1 release on Nov 5 showed reserves picked up from the prior week's post-2020 lows to $2.85T, up $24B in the latest week but still down $182B over the last month.
- This of course has been the mirror image of movements in the Treasury General Account which briefly touched $1T though settled Wednesday at $943B (a fall of $41B on the week, but a rise of $149B in a month).
- Treasury indicated this week that it maintained its $850B quarter-end cash target, with the recent buildup due in part to the federal government shutdown slowing outflows but also a typical cautionary cash rase ahead of large seasonal expenditures.
- The Fed's reverse repo facilities remained in relatively negligible territory albeit with a slight pickup at month-end October.
- Overall the Fed has recognized that it may be getting close to the transition point between once-"abundant" and now merely "ample" reserves, hence October's decision to end net asset runoff as of Dec 1.
- NY Fed President Williams said Friday morning “Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves."
FED: Financial Stability Report Eyes Term Premia And "Opaque" Financing Risks
Nov-07 21:31
A few highlights from the Fed's latest Financial Stability report out today (link):
- In terms of asset valuations, "Prices remained high relative to their historical relationship with fundamentals across a range of markets."
- The report highlights high leverage in the financial sector: "Vulnerabilities associated with financial leverage remained notable. Over the past few years, hedge funds’ leverage has steadily increased across a broad range of strategies, including those involving Treasury securities, interest rate derivatives, and equities"
- However "Vulnerabilities from business and household debt remained moderate" and "The banking sector remained sound and resilient overall, and most banks continued to report capital levels well above regulatory requirements."
- In terms of future risks, "A further increase in term premiums leading to higher-than-anticipated long-term interest rates, particularly if accompanied by
persistent inflation, could pose risks for both borrowers and lenders" - And the Fed has its eye on "opaque off-balance-sheet funding arrangements" re the recent voliatility caused by First Brands and Tricolor: "The recent bankruptcies of two privately held firms, an auto parts supplier and a subprime auto lender, so far appear to be isolated events. However, these examples highlight that unexpected losses could arise from opaque off-balance-sheet funding arrangements that may be used by certain privately held firms."
