US TSYS: Late SOFR/Treasury Option Roundup

SOFR & Treasury options took advantage of the rebound in underlying futures to buy puts/put spreads (Dec SOFR put tree looking at year end Fed on hold), unwind calls with a few exceptions. Not a strong reaction to the June FOMC minutes - while projected rate cut pricing gained momentum vs morning (*) levels: Jul'25 at -1.7bp (-1.2bp), Sep'25 at -18.6bp (-17.3bp), Oct'25 at -33.7bp (-31.7bp), Dec'25 at 52bp (-49.3bp).

• SOFR Options:
  • Update, +12,000 SFRZ5 95.62/95.75/95.81 broken put trees, 0.5 ref 96.17
  • +2,000 SFRU5 96.00/96.25 1x2 call spds 1.0 vs. 95.90/0.05%
  • +2,000 SFRU5 96.00/96.25 call spds, 2.75
  • -2,000 SFRH6 96.37/96.87 call spds, 15.0 ref 96.40/0.26%
  • +2,500 SFRU5 95.62/95.75 put spds, 3.0
  • -15,000 0QU5 97.12/98.12 call spds, 5.25 ref 96.745
  • +5,000 SFRU5 96.00 calls, 4.75 ref 95.88
  • +20,000 SFRU5 96.06/96.12 call spds, 0.75
  • +6,000 SFRU5 95.75/96.00/96.25 call trees, 9.0 ref 95.865
  • +4,000 SFRZ5 95.87/96.62 call over risk reversals, 1.0 vs. 96.15/0.40%
  • +1,000 SFRZ5 96.25 straddles, 38.5
  • over +20,000 SFRQ5 95.68/95.75 put spd, 1.25 (more on a 2x3 ratio)
  • +2,000 SFRQ5/SFRU5 95.75 put spd, 2.0
  • 3,000 SFRU5 95.62/95.75 put spd, 3.0
• Treasury Options:
  • Block, 9,000 wk2 TY 111.5 calls, 3
  • 2,000 USQ5 110/112 put spds 14 ref 113-18
  • 10,000 TYQ5 110.5/111.5 put spds 33 vs. 111-00/0.34%
  • -5,000 TYU5 111 calls, 46 vs 110-24/0.44%
  • +2,250 TYU5 110/110.5/111/111.5 call condor, 7 vs 110-30/0.05%
  • 3,950 TYQ5 111.75/112.25 call spds ref 110-28
  • -5,000 wk2 TY 111 put, 15
  • +5,000 wk2 TY 111 straddle, 26 vs 110-28.5 to -29/0.20%

• Stocks are drawing some support following the June FOMC minutes release late Wednesday, Treasuries extend highs, curves flatter as markets digested uneven tariff-tied inflation progress. Currently, the DJIA trades up 163.08 points (0.37%) at 44403.01, S&P E-Minid up 28 points (0.45%) at 6300, Nasdaq up 163.8 points (0.8%) at 20582.09.
• Communication Services and Information Technology sectors continued to lead gainers in late trade, interactive media and entertainment shares buoyed the former with Meta Platforms +2.08, Alphabet +1.39%, Match Group +1.11% and Warner Bros Discovery +0.92%.
• Tech sector shares were supported by Enphase +4.37%, Arista Networks +3.55%, Broadcom +2.04%, Palantir Technologies +1.80% and NVIDIA +1.74% (fist company to reach $4T market cap).
• On the flipside, Consumer Staples and Energy sectors underperformed in late trade, The Hershey Co -4.30%, Altria Group -3.65%, Monster Beverage -3.58% and Mondelez Int -1.92% weighed on the Consumer Staples sector while Targa Resources -1.61%, EOG Resources -1.56%, Devon Energy -1.42% and Kinder Morgan -1.33% kept pressure on the Energy sector.

There was not much that was really new on the inflation outlook in the June minutes vs what we have heard from FOMC participants in the last 3 weeks. Overall, "participants noted that the progress in returning inflation to target had continued even though that progress had been uneven" (and in a nod to the hawks and perhaps a little surprising given decent inflation readings, "a few participants noted that there had been limited progress recently in reducing core inflation.").

• The viewpoints on tariffs' impact on inflation were not particularly novel. The overall - seemingly unanimous - message was that tariffs are "likely to put upward pressure on prices", but there is "considerable uncertainty, however, about the timing, size, and duration of these effects."
• The main language on tariffs being "transitory" is as follows - notice that "a few" thought tariffs would have a one-off impact (slightly more than the "couple" who could support a July cut) - but this was very much portrayed as a minority view: "While a few participants noted that tariffs would lead to a one-time increase in prices and would not affect longer-term inflation expectations, most participants noted the risk that tariffs could have more persistent effects on inflation, and some highlighted the fact that such persistence could also affect inflation expectations."
• On the cautious side of the table, "many" thought it would take "some time" for the rise in tariffs to be reflected in goods inflation, and "several" commented that inflation could be worse if "tariffs disrupted supply chains or acted as a drag on productivity." And additionally, "several" thought firms whose products aren't directly subject to tariffs could raise prices.
• On the more dovish side though, "many" thought the inflation impact could be more limited from the supply side - "if trade deals are reached soon, if firms are able to quickly adjust their supply chains, or if firms can use other margins of adjustment to reduce their exposure to the effects of tariffs".
• And on the demand side, "several participants observed that the pass-through of tariffs might be limited if households and businesses exhibit a low tolerance for price hikes or if firms seek to increase their market share as others raise their prices", with "a few" noting that smaller/tighter-margin businesses may have to pass costs through to a greater degree.
• Taking a more hawkish bent was the discussion of inflation expectations: it appeared consensus on the Committee that "longer-term inflation expectations continued to be well anchored and that it was important they remain so", but it's slightly surprising that so many ("several") were concerned about higher short-term expectations spilling over into near-term inflationary pressures: ("shorter-term inflation expectations had been elevated and that this development had the potential to spill over into longer-term expectations or to affect price and wage setting in the near term").
• In a line of thinking expressed publicly by a few FOMC members, "some" said "that because inflation has been elevated for some time, there was a heightened risk of longer-term inflation expectations becoming unanchored if there is a long-lasting rise in inflation."