A monumental transaction in U.S. short-term interest-rate futures took place on Tuesday, marking the largest of its kind and contributing to the uplift of the Treasury market. This event revolved around the trading of futures on the Secured Overnight Financing Rate (SOFR), which has emerged as the dominant instrument for speculating on Federal Reserve interest rate decisions since its introduction in May 2018, taking the baton from the now-defunct eurodollar futures.
The transaction unfolded shortly after 9 a.m. in New York, with a whopping 75,000 contracts for December 2024 SOFR futures being exchanged in a block trade. This was confirmed by CME Group Inc. to be the most substantial trade for this product to date. The aftermath of the trade saw prices inching up, hinting at a buyer-driven move, while Treasury yields dipped closer to the day's lows. Block trades are characterized by their private negotiation and adherence to a minimum size requirement.
The strategic positioning in this contract could potentially reap rewards if the upcoming March consumer price index data, expected to be released on Wednesday, signals a benign inflation environment. This could rejuvenate expectations for the Fed to slash rates three times within the year. Alternatively, the trade might have been executed to unwind a short position, thereby mitigating risk in anticipation of the data release.
Optimism regarding the inflation trajectory was further fueled on Tuesday by predictions from State Street Global Advisors, managing assets worth $3.6 trillion, foreseeing an aggressive Fed rate cut of half a point as early as June. Adding to this sentiment, Lael Brainard, a top economic advisor to President Joe Biden, shared with CNBC her expectation of steady progress on inflation in the forthcoming months.
By late Tuesday, the swaps market was factoring in approximately 65 basis points of Fed rate reductions, translating to about two and a half moves of 25 basis points each, by year-end. The December 2024 SOFR futures were observed trading at a price of 95.33 by 3 p.m., slightly above the block trade's price.
