The period leading up to the September 2024 rate cut was characterized by exceptional stability in SOFR. From July 27, 2023, to September 18, 2024, when the Fed Funds target range was at its peak (525 to 550 basis points), the daily standard deviation of SOFR was just 1.91 basis points (bps). This low level of fluctuation reflected a stable money market environment. 

However, since the initial 50 bps rate cut on September 18, 2024, the daily volatility of SOFR has surged. In the subsequent four periods defined by lower Fed Funds target ranges (Figure 1), the daily standard deviation of SOFR has consistently ranged between 2.62 and 5.72 bps. This is a measurable and persistent increase in day-to-day rate movement, signaling a new, more dynamic environment for the benchmark.

^{Source: Federal Reserve Bank of New York data}

This change has significant implications for money market participants, as increased volatility in the underlying benchmark rate translates directly into heightened uncertainty in pricing and hedging overnight secured funding.

To understand what is driving this volatility, it's essential to distinguish SOFR from the Effective Federal Funds Rate (EFFR), another key measure of the overnight funding market. The data highlights a critical difference: while SOFR volatility has climbed, the EFFR has remained largely stable, with an almost negligible standard deviation in all but the most recent target range period.

• SOFR measures the cost of borrowing cash overnight collateralized by Treasury securities (the secured repo market). These transactions are conducted by a wide array of market participants seeking overnight financing.
• EFFR consists of domestic uncollateralized borrowings in U.S. dollars by depository institutions from other depository institutions and certain other entities (the unsecured interbank market). The Federal Reserve directly influences this rate through its administered rates, such as the interest paid on reserves (IORB).

The observed phenomenon—volatility in SOFR, but not in EFFR—implies that the overnight repo market is experiencing more day-to-day volatility than the uncollateralized interbank market. This difference is key to locating the source of the market's recent instability.

The increased volatility is often accompanied by spikes in the SOFR-EFFR spread, where SOFR trades significantly higher than EFFR. A positive spread (SOFR > EFFR) can be a sign of low levels of cash in overnight money markets. 

One recent example occurred on September 15, 2025. On this date, SOFR printed at 451 bps, a significant jump from 442 bps the day prior, and a substantial 18 bps higher than the EFFR of 433 bps. This brief but sharp increase in the SOFR rate implies an intense, temporary demand for secured funding.

The market conditions on that day provide a clear illustration of the potential drivers:

• Treasury debt settlements and tax payments: The date coincided with a deadline for corporate tax payments and significant Treasury debt settlements. These events pull large amounts of cash from the financial system and move them to the Treasury's account at the Fed, reducing the overall supply of reserves available for lending.
• Increased funding needs: The combined effect of these flows meant that banks and primary dealers needed a sudden influx of cash to meet their settlement and payment obligations. This elevated their demand for secured overnight funding, pressuring SOFR higher.
• Fed’s SRF: In a sign of tight money markets, U.S. banks borrowed $1.5 billion from the Fed's Standing Repo Facility (SRF) on September 15, compared to zero the day before. The SRF acts as a liquidity backstop, and its utilization indicates that market participants were seeking non-market-based funding to relieve acute pressure.

Crucially, this situation was temporary. SOFR reverted back to 439 bps (just 6 bps above EFFR) on the following day, demonstrating the market's ability to self-correct. However, the event clearly showed the impact of tight money market conditions on the secured funding rate, confirming that structural events and periodic cash drains are potent drivers of SOFR volatility.

The emergence of greater volatility creates new risks for corporations, banks and investors whose contracts reference SOFR. This instability also generates opportunities for traders who use the risk management tools available in the derivatives market, such as our One-Month SOFR and Fed Funds futures contracts.

These futures are based on the arithmetic average of their respective rates over the same delivery month. This design makes them effective tools for hedging the expected average level of rates for the coming month. 

Key features that make these contracts highly effective for trading and hedging the SOFR/EFFR relationship include:

• Inter-commodity spreading and hedging: Since SOFR and EFFR tend to track each other closely over time, the two contracts provide a natural basis for relative-value trading and hedging strategies. A trader who anticipates a short-term tightening of money markets might structure a trade betting on a temporary widening of the SOFR-EFFR spread.
• Margin efficiencies: We offer substantial margin offsets of up to 75% between the two products. This capital-efficient structure encourages market participants to trade the spread, increasing liquidity and facilitating risk management across the two main overnight benchmarks.
• Deep liquidity: Both contracts are highly liquid, which is critical for efficient price discovery and the execution of large trades. One-Month SOFR futures currently have an open interest of nearly two million contracts, while Fed Funds futures have nearly 2.7 million contracts. This deep market liquidity ensures that the volatility of the underlying spot rate can be actively managed and monetized.

In conclusion, the post-rate-cut environment has coincided with greater daily SOFR fluctuation compared to SOFR’s uncollateralized counterpart, the EFFR. This divergence points to temporary stress and technical factors, such as tax dates and Treasury settlements, in the secured repo market. For sophisticated money market traders, this volatility is not merely a risk but an opportunity to use highly liquid, cross-margined SOFR and Fed Funds futures. The stability of the EFFR confirms that the Federal Reserve retains control over the general level of interest rates, but the higher volatility of SOFR underscores the persistent, transaction-driven nature of this risk-free benchmark.