Goldman Recommend Entering SFRZ3/M4/Z4 Belly Cheapening Fly With Options Hedge

Goldman Sachs have noted that their “economists do not expect the upcoming Fed meeting to break new ground. Thus far, comments from various Fed speakers suggest symmetric risks around their 5.00-5.25% rate projection for this year (also our baseline). One area where Fed officials seem to be speaking in union is their conviction that policy rate cuts as implied by market pricing (for this year) are unlikely. We share this view.”

• “Rather than the inversion itself, we are sceptical of the extent of inversion - by some measures, the deepest since the early 1980s - and believe it offers an attractive opportunity”
• “Specifically, we like the SFRZ3/M4/Z4 belly-cheapening fly, given the nearly 100bp of cuts priced in H124. If our ‘no recession’ baseline is realised, the curves at the front end should become less inverted, or at the very least, should be pushed further out into the future.”
• “The fly has a roughly 0.4 beta with the belly and is therefore exposed to a rally (for instance, in a recessionary outcome). To hedge this, we recommend buying an out-of-money 1-Year midcurve call on the M24 SOFR futures contract (we like the 97.00 strike, which will leave the fly underhedged in a modest rally, but should insulate against larger moves).”