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STIR: SFRZ4/Z5 Probes Key Resistance Area

STIR
BulletMarketsFixed Income Bullets

The recent run of hawkish Fed repricing has pushed SFRZ4/Z5 to a key resistance area, recently challenging the downtrend drawn off the Mar 20 ’23 high and old support at the March 12 ‘24 low.

  • Pricing of Fed cuts tails off through next summer, with ~50bp showing through Dec ’24, ~93bp priced through March '25 followed by 122bp of cuts through June '25 and 139bp of cuts through September '25.
  • Those that look for dovish data to reintroduce deeper pricing of Fed rate cuts through the second half of next year may look to deploy flattener trades in this spread, particularly if data starts to come in on the softer side of expectations.
  • Meanwhile, a continued run of firmer-than-expected labour market data would present greater risk to the resistance area.

Fig. 1: SOFR Dec '24/Dec '25 Spread (SFRZ4/Z5)

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The recent run of hawkish Fed repricing has pushed SFRZ4/Z5 to a key resistance area, recently challenging the downtrend drawn off the Mar 20 ’23 high and old support at the March 12 ‘24 low.

  • Pricing of Fed cuts tails off through next summer, with ~50bp showing through Dec ’24, ~93bp priced through March '25 followed by 122bp of cuts through June '25 and 139bp of cuts through September '25.
  • Those that look for dovish data to reintroduce deeper pricing of Fed rate cuts through the second half of next year may look to deploy flattener trades in this spread, particularly if data starts to come in on the softer side of expectations.
  • Meanwhile, a continued run of firmer-than-expected labour market data would present greater risk to the resistance area.

Fig. 1: SOFR Dec '24/Dec '25 Spread (SFRZ4/Z5)

Keep reading...Show less