Bloomberg18/04 09:16

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  Open interest surges after record volumes trade in SOFR spread
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  Wager goes against consensus calls for higher-for-longer rates

Traders in the interest-rate futures market are piling into a contrarian bet that would pay off in the event of aggressive Federal Reserve monetary easing this year.

The wager is happening in futures on the Secured Overnight Financing Rate &mdash which closely tracks the central bank&rsquo s key policy rate &mdash and it involves buying the December 2024 contract while selling the contract due in December 2025.

Scenarios in which the trade stands to gain include the Fed front-loading interest-rate cuts before the presidential election in November, and being more aggressive than the 40 basis points of easing that&rsquo s currently priced into the market for this year.

The trade goes against the current consensus on Wall Street, where strategists have been dialing back their expectations for rate cuts amid continuing evidence of US economic strength and sticky inflation. That recalibration has sparked a rout in Treasuries that drove the US two-year yield to as high as 5% this week.

The futures position, a bet that the 2024 contract will outperform the 2025 contract, saw record volumes on Tuesday. A huge gain in positioning Wednesday pointed to new wagers, giving fresh momentum to the trade.



Open interest in the December 2025 SOFR futures rose by 133,000, CME data shows, equivalent to a gain or loss of $3.3 million per basis point move. On Tuesday, the 12-month spread breached the 200-day moving average, a level which had held for 10 months.

Sentiment favoring interest-rate cuts this year has also been emerging in SOFR options this week, with buying of deep-out-the money calls continuing Wednesday, targeting a central bank rate as low as 3% by the December policy meeting, down from a range of 5.25% to 5.5% now.

A sudden downturn in US economic data could warrant a more aggressive path of monetary policy easing than priced over the coming months. The trade may also be targeting the potential for rising inflation expectations beyond this year, a scenario that could see the December 2025 contract underperform and the spread to steepen.