February 2023 Rates Recap

  • 7 Feb 2023
  • By CME Group

SOFR options register largest monthly OI gain in exchange history

With inflows topping 13.4M contracts, SOFR options set the single largest month-over-month gain in open interest of any product in CME Group history in January, surpassing the previous high of 10.4M set by Eurodollar options in 2016:

  • Trading volume in SOFR options soared during the month, averaging a record 1.8M contracts/day as traders hedged portfolios and expressed views around the uncertain path for rates in 2023.
  • SOFR futures volumes were equally elevated, averaging 2.6M contracts/day.
  • Total open interest in SOFR now exceeds 43.7M contracts (34M in options and 9.7M in futures).
Figure 1: Open Interest Change MoM (millions)

Source: CME Group

2022 trading and liquidity review

Following a record 2022 that saw volatility triple off the 2021 lows, we summarized the resiliency of our markets by analyzing key measures of liquidity, including cost-to-trade, ADV, OI, and breadth of participation.

Traders embrace €STR futures as a precise hedge for EU money markets

€STR futures set a new monthly high for trading volume in January as tighter spreads and increased size at top of book attracted more end-user flow.

Figure 2: CME €STR futures ADV and OI

Source: CME Group

TBA futures liquidity continues to build

The MBS market is now more accessible, thanks to recently launched 30-Year UMBS TBA futures. These contracts, via an equal access electronic order book, offer transparent price discovery and streaming liquidity on key coupon rates. Activity in outrights, dollar rolls, and coupon swaps has led to more than $565M in notional volume in just three months of trading.

Upcoming enhancements effective with the May 2023 contracts*: 

  • Delivery process: All positions will go to settlement as TBA forwards (removing cash-settlement), and the delivery notice period will be brought forward by two hours on the last trading day (details).
  • 6.5% coupons will be listed for first trade date Feb. 27 beginning with the May 2023 contract (details).

Eris SOFR Swap futures coming to portfolio margining

Commencing February 27, Eris SOFR Swap futures will be eligible for portfolio margining with CME Cleared OTC swaps, unlocking new efficiencies and deeper liquidity for Eris SOFR contracts. 

Volatility expectations in U.S. rates are changing

Blu Putnam, Chief Economist

Volatility expectations in U.S. rates markets are changing. Once the Fed acknowledges that peak rates have been reached, the new narrative will focus on data dependency. Both inflation and jobs data may produce some confusing reports. And, the ups and downs of the data will intersect an environment in which Fed guidance (holding rates high for a long time) is at odds with the futures markets (rate cuts starting in late 2023 and deepening into 2024).

Markets will debate the disconnect between the headline CPI and the Fed’s preferred PCE core, ex-food and energy, inflation data. As 2023 progresses, headline inflation may drop below core inflation, sparking renewed debate about whether the Fed will respond to the good news on headline or the less good news on core. 

The jobs data may be even harder to interpret. The BLS just released its benchmark revisions in the January 2023 data, and they included huge increases to employment over 2022 not previously reported. And the pandemic and the rebound have changed spending habits in ways that are likely to make seasonal adjustment more difficult to decipher as some sectors continue to add jobs while others cutback.

Finally, there is the debt ceiling debate. The politics are more polarized this time around, suggesting a more destabilizing debate than the episode in 2011 in which the U.S. credit rating was downgraded.

Volatility calmed down in late 2022, but data dependency may bring some sharp swings in sentiment in 2023.

Eurodollar fallbacks fast approaching

Ensure you're ready for April 14, 2023 when all Eurodollars (excluding May and June futures and options) will be converted to SOFR equivalents.

Review the implementation plan for details, or use the daily Indicative Cash Flow Report to see how Eurodollar positions would be converted to the corresponding SOFR positions, as well as the cash flows for each.

New learning opportunities

Webinar: Trading SOFR Packs: Review the pricing mechanics for SOFR packs, and learn how these key intra-market strategies can be used to express views on the slope and shape of the SOFR forward curve.

Article: Cash and Carry with RFRs: Learn about new trading and risk management opportunities unlocked by RepoFunds Rate (RFR) futures, including a cash and carry arbitrage strategy with real-world examples.

Article: Trading Strategies for FOMC: Rich Excell is back with his latest "Excell with Options". In this edition, Rich highlights how traders could play slumping volatility levels in SOFR options with a potential June short straddle using a long put strategy.

Data as of January 31, 2023, unless otherwise specified
*Pending regulatory review

View an archive of the Rates Recap online at cmegroup.com/ratesrecap.