What signal? The largest-ever futures trading in the US short-term interest rate market occurred
On Wednesday, the U.S. short-term interest rate market saw the largest futures trading volume in history, with about 118,000 contracts changing hands. Analysis suggests that this may reflect investors' expectations of future Fed easing policies being lower than market expectations, or profit-taking. The trade is linked to the Secured Overnight Financing Rate (SOFR), indicating market expectations of future rate cuts. The Chicago Mercantile Exchange confirmed that this was the largest trade for the product, and the SOFR benchmark price dropped significantly after the trade
According to Zhitong Finance, on Wednesday, there was a large-scale trading activity in the U.S. short-term interest rate market. Analysis suggests that this may be investors directly betting that the Fed's easing this year is less than current expectations. It could also be investors taking profits and closing out their long positions, as trading in the contract is close to its annual high. As of the time of writing, around 118,000 contracts changed hands during the U.S. session, marking the largest such transaction in the history of the U.S. futures market. These bulk trades are linked to the Secured Overnight Financing Rate (SOFR), which closely reflects the recent trends in the Fed's monetary policy. Swap traders speculate that there will be another 75 basis points rate cut in 2024, earlier than the target of a 50 basis points rate cut announced by policymakers.
The Chicago Mercantile Exchange (CME) confirmed that this is the largest trade of this product to date. Bulk trades are privately negotiated single-price transactions typically used by institutional investors who prioritize scale over price sensitivity. This amount exceeds the 75,000 trades in April, which were buyers of the same December 2024 SOFR futures contract. Many of these contract trades are anonymous, making it difficult to determine the companies behind these bets.
Shortly after the bulk trade, the underlying price of the December 2024 SOFR dropped significantly, indicating that the trade was initiated by the seller. The 2-year U.S. Treasury yield quickly reversed, rising to the day's high, after hovering near lows from 2022.
In early September, there was a large volume of buying, about 20 basis points lower than Wednesday's price. With a scale of 118,000 futures contracts, this bet equates to a risk weight of approximately $3 million per one basis point change. In trades of this scale, a 20 basis point change is equivalent to a profit of $60 million. The Chicago Mercantile Exchange announced an increase in the preliminary open interest contract price in the early Asian session, which may signal a new position for some traders, albeit with a small increase