{"id":613,"date":"2025-09-18T13:00:13","date_gmt":"2025-09-18T13:00:13","guid":{"rendered":"https:\/\/www.stirfutures.co.uk\/?p=613"},"modified":"2025-09-18T14:31:05","modified_gmt":"2025-09-18T14:31:05","slug":"quarter-end-fed-funds-vs-sofr-trade","status":"publish","type":"post","link":"https:\/\/www.stirfutures.co.uk\/?p=613","title":{"rendered":"Quarter-End Fed Funds vs SOFR Trade"},"content":{"rendered":"\n

At quarter-end, US money markets often experience temporary funding pressures.\u00a0This is due to factors like large Treasury settlements, tax payments, and regulatory reporting dates, which can cause volatility in short-term rates such as the Secured Overnight Financing Rate (SOFR) and the effective Fed funds rate (FF). The spread between these two rates (SOFR\/FF) can widen or narrow sharply around these dates\u00a0<\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

<\/p>\n\n\n\n

Why Does the Spread Move?<\/h3>\n\n\n\n
    \n
  • Quarter-end effects:<\/strong> Banks and money market funds adjust their balance sheets for regulatory reasons, often leading to a temporary drain in reserves from the system.<\/li>\n\n\n\n
  • Foreign banks (FBOs):<\/strong> These institutions hold large reserves at the Fed, much of which is funded in repo markets. At quarter-end, they willingly shed reserves as their demand temporarily drops, moving cash into the Fed\u2019s Overnight Reverse Repo Facility (ONRRP). This is a temporary pullback, not a sign of systemic stress.<\/li>\n\n\n\n
  • Market pricing:<\/strong> As a result, the SOFR\/FF spread can become more negative, reflecting perceived funding risk. <\/li>\n\n\n\n
  • Buy SOFR futures and sell Fed funds futures<\/strong>. As quarter-end passes and funding pressures ease, the spread should narrow (become less negative), allowing the trade to profit.<\/li>\n<\/ul>\n\n\n\n

    Trade example:<\/strong><\/h4>\n\n\n\n
      \n
    1. Initiate the Trade:<\/strong>\n
        \n
      • Buy 1 contract 1m SOFR futures.<\/li>\n\n\n\n
      • Sell 1 contract 1m Fed funds futures.<\/li>\n\n\n\n
      • @ -15bp.<\/li>\n<\/ul>\n<\/li>\n\n\n\n
      • Quarter-End Passes:<\/strong>\n
          \n
        • Funding pressures ease.<\/li>\n\n\n\n
        • The spread narrows to -10bp (SOFR rises relative to FF, or FF falls relative to SOFR).<\/li>\n<\/ul>\n<\/li>\n\n\n\n
        • Close the Trade:<\/strong>\n
            \n
          • Sell the SOFR futures contract.<\/li>\n\n\n\n
          • Buy back the Fed funds futures contract.<\/li>\n\n\n\n
          • The spread has change of +5.0bp<\/strong>.<\/li>\n<\/ul>\n<\/li>\n\n\n\n
          • Profit Calculation:<\/strong>\n
              \n
            • Each basis point move in the spread is worth a fixed amount per contract (depending on contract specs).<\/li>\n\n\n\n
            • If the notional value per bp is, for example, $41.67 per contract:\n
                \n
              • Profit = 5bp \u00d7 $41.67 = $208 per contract<\/strong>\u00a0<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

                At quarter-end, US money markets often experience temporary funding pressures.\u00a0This is due to factors like large Treasury settlements, tax payments, and regulatory reporting dates, which can cause volatility in short-term rates such as the Secured Overnight Financing Rate (SOFR) and the effective Fed funds rate (FF). The spread between these two rates (SOFR\/FF) can widen […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-613","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/613","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=613"}],"version-history":[{"count":6,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/613\/revisions"}],"predecessor-version":[{"id":623,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=\/wp\/v2\/posts\/613\/revisions\/623"}],"wp:attachment":[{"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=613"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=613"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.stirfutures.co.uk\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=613"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}