Wall Street caught in disagreement over financing costs: JP Morgan and Citigroup have differing views on the trend of SOFR, each sticking to their own trading strategy.

Note that there is a difference of opinion among Wall Street strategists on whether the US financing market will loosen in the coming months, mainly due to the recent volatility in overnight borrowing costs. A combination of events is pushing up short-term interest rates. The US Treasury is rebuilding its cash reserves by issuing more short-term bonds, while the Federal Reserve is shrinking its balance sheet, and the central bank's key overnight funding tool usage has dropped to near zero. All these pressures are keeping investors alert to the sharp rise in borrowing costs. Of particular concern is the possibility that the Secured Overnight Financing Rate (SOFR) could rise further in the coming months, with differing views on whether financing costs will ease. Since late August, the SOFR benchmark rate has consistently been above the Federal Reserve's target rate. JPMorgan and Citigroup presented contrasting views on September 12 and recommended opposing trading strategies. JPMorgan believes investors are overestimating the risk of rising financing costs, while Citigroup believes the current situation will continue until the end of 2025. JPMorgan and Citigroup have differing views on the future of SOFR and the federal funds rate. A team led by Teresa Ho at JPMorgan expects overnight rates to ease by the end of the year and recommends buying December SOFR futures while selling an equivalent amount of federal funds futures. They expect the spread between SOFR (currently at 4.42%) and the 30-day federal funds rate (currently at 4.33%) to narrow by the last month of 2025. In the December futures market, this spread is currently around -7.5 basis points. JPMorgan believes that bank reserves are not scarce, and the Fed's Standing Repo Facility (SRF) - allowing eligible institutions to borrow cash against Treasury and agency securities at the upper policy rate target - is an important liquidity backstop. They stated that the issuance of a large amount of bills by the Treasury after resolving the debt ceiling issue this year will also slow down. Ho stated in a report, "We do not believe that the recent rise in the SOFR reflects imminent liquidity events, and we believe banks will prepare to deploy reserves at the appropriate time." Meanwhile, a team led by Jason Williams at Citigroup believes financing costs will remain high by the end of the year. They recommend traders to short December SOFR contracts relative to federal funds rate, expecting SOFR to be about 4-5 basis points higher than federal funds rate on "good days," with a fair value closer to -10 basis points. Williams wrote in a report, "We do expect to see SOFR gradually rise in the coming months. Based on guidance from the Treasury's August refunding meeting, where they will increase some Treasury auction sizes in October, we expect reserves to continue to decline." BI strategists Will Hoffman and Ira Jersey stated, "While most of the net issuance post-debt ceiling has become a thing of the past, the most severe financing pressures are still ahead -the Fed's market-based reserve scarcity comfort zone could be tested." JPMorgan and Citigroup are not the only banks holding differing views. Last week, Barclays Bank exited a position buying the spread between September SOFR and federal funds rate just a month after establishing the position, noting that upward pressure on financing costs could become the "new default setting" as the market enters the end of the quarter. At Morgan Stanley, strategists are adamant that the market will ease the quickest next month. They recommend going long on the spread between October 2025 SOFR and federal funds rate, believing bank reserves are still sufficient. Bank of America closed out a bearish position on the same term on Monday, calling the spread "close to fair value pricing." Analysts led by Mark Cabana now recommend going long on the spread between January 2026 SOFR and federal funds rate, believing federal funds rate may gradually rise within its target range early next year. Nevertheless, JPMorgan and Citigroup agree on one thing: the situation of September 2019 is unlikely to repeat itself, when financing costs soared and the Federal Reserve injected billions of dollars into the financing market.