Record bets on potential liquidity pressures in US markets

Trading volumes in US interest rate futures reached a record level this week, as investors focused on spreads between overnight lending rates — signaling the potential return of pressures in short-term funding markets.

Trading activity centered on the spread between the Secured Overnight Financing Rate (SOFR), which reflects borrowing costs backed by Treasury collateral, and the Effective Federal Funds Rate (EFFR).

Total trading in July SOFR futures climbed to a record 56,590 contracts on April 21, with notable activity also recorded in May and June contracts.

The move comes amid expectations of a shift in liquidity conditions, as the Federal Reserve plans to reduce its monthly purchases of Treasury bills to $25 billion after the end of the tax collection season, while the US Treasury seeks to rebuild its cash reserves.

Analysts at Citigroup said that increased Treasury bill issuance could disrupt the balance between cash and collateral in the repo market, potentially pushing the spread between overnight funding rates and the federal funds rate — currently trading in negative territory — back into positive territory.