Increased concerns about liquidity, traders are heavily betting on the federal funds rate spread.

As market concerns about liquidity continue to rise, traders are pouring into a niche area of the U.S. interest rate futures market at record levels, betting that if the Federal Reserve takes action to ease monetary market funding pressures, the spread between overnight lending rates will change. The Chicago Mercantile Exchange Group (CME Group) confirmed in a post on its X platform that trading volume in futures spreads related to secured overnight financing rate (SOFR) and federal funds rate reached historical peaks on Wednesday. The group further stated on Thursday that the total trading volume for one-month SOFR-federal funds spread trades exceeded 400,000 futures contracts. SOFR (Secured Overnight Financing Rate) is an overnight cash borrowing rate benchmark collateralized by U.S. Treasury bonds, and as of October 29, the latest fix rate was 4.27%. The Effective Federal Funds Rate is the weighted average of the interbank overnight borrowing rate, with the latest fix rate at 4.12%, 15 basis points lower than SOFR. Traders' intense bets on this spread reflect escalating concerns in the market about how the spread between the two major benchmark rates will change if the Fed adjusts management rates after stopping balance sheet reduction. The risks associated with related plays are continually expanding. One of the key factors affecting spread changes is whether the Federal Reserve will take measures to address the volatility of the overnight repurchase market. The overnight repurchase market is an important component of the financial system's "infrastructure" and a potential "barometer" of funding stress, with the SOFR rate calculated based on repo market data. Over the past few weeks, accumulating pressure signals in the market have led some Wall Street strategists to believe that the Fed will take action to improve market liquidity. However, Fed Chairman Jerome Powell did not announce any measures to alleviate liquidity pressure on Wednesday, nor did he suggest any future actions. On Wednesday, disappointment triggered selling. The Fed's decision not to take direct action on repo rates initially disappointed the market, leading to a new round of active trading in SOFR-federal funds spread tradesespecially in the November contracts, with futures spread trading volume exceeding 200,000 contracts. The flow of trades was mainly focused on selling SOFR futures and buying federal funds futures, causing the spread to fall to a cyclical low of 11.5 basis points, showing an inverted status. On Thursday, traders re-bet on a policy shift. On Thursday, traders began to repurchase the spread of November contracts that they had sold before, partly to position themselves for a possible change in the Fed's stance in the coming weeks and also to reduce risk in the face of continued funding pressures. Wall Street strategists expect liquidity pressures to continue into November, driven primarily by two factors: first, the Fed's balance sheet reduction will continue for another month, leading to a further decrease in bank reserve sizes; second, the U.S. Treasury will issue more short-term bonds, absorbing a large amount of cash from the market.