Update on ZQ and SR1 mispricing
The mispricing has narrowed in the direction the thesis implied. Marked as an illustrative trade, it now looks like this:
Trade Snapshot
| Action | Contract | Price |
|---|---|---|
| Buy | ZQZ5 | 96.2300 |
| Sell | ZQZ5 | 96.2225 |
| P/L from ZQ | -0.0075 | |
| Sell | SR1Z5 | 96.1325 |
| Buy | SR1Z5 | 96.0975 |
| P/L from SR1 | +0.0350 |
Performance
The math is straightforward:
- Total P/L: 0.0275 points
- Value: 0.0275 * $4116 = $113.19
- Return: 2.26% on an illustrative $5,000 of capital
Analysis
The scenario that has panned out so far is EFFR expectations dropping a bit (staying relatively stable) while SOFR is rising.
Essentially, the market is starting to price in that SOFR will detach from the Fed target and trade higher, while the EFFR remains high. This is consistent with the research view that the market was underpricing the volatility of SOFR compared to the managed EFFR.
We will keep tracking the spread as it develops.