CME SOFR Futures and Quarter-End Volatility in Treasury Repo Rates

“…Spreads have become more variable, have increased to high values at times, and in the case of repo and foreign exchange swaps have become especially volatile around month-end, and, especially, quarter-end dates.” 1  - Simon Potter, Exec. Vice President, Federal Reserve Bank of New York

Heightened levels and volatility in U.S. Treasury repo rates at month-ends and quarter-ends are long familiar, both to money market practitioners and to monetary policymakers. The behavior of the Secured Overnight Financing Rate (SOFR) benchmark during the last half of June 2018 was no exception:

  • From Thursday, 14 June (just after the previous day’s Federal Open Market Committee announcement that its federal funds rate target range had shifted from 1.50-1.75 percent up to 1.75-2.00 percent), through Thursday, 28 June, daily SOFR values hovered around 1.90 pct.
  • Then on Friday, 29 June (the quarter’s last business day), SOFR made a temporary 22-basis-point excursion up to 2.12 percent.

Unusual for short-term interest rate futures, trading volume in CME June 2018 One-Month SOFR (SR1M8) futures welled up to nearly 3,300 contracts during the final four trading days, with nearly 3,000 contracts changing hands on Friday, 29 June alone.  More importantly, the contract market performed remarkably in absorbing and reflecting the impact of SOFR’s quarter-end volatility:

  • On its final trading day, Friday, 29 June, SR1M8’s last trade price, 98.155, signified market expectation of a daily average SOFR of 1.845 percent for the month.  After published SOFR values for Friday, 1 June through Thursday, 28 June are netted out, this means that, at the last trade, market participants collectively anticipated that the day’s SOFR value would be precisely 2.12 percent.2
  • SR1M8’s daily settlement price for Friday, 29 June was 98.16, making a contract rate of 1.84 percent. Using the same arithmetic as above, this implies a market expectation that the day’s SOFR value would reach either 2.04 percent or 2.05 percent – impressively close to the mark, even if not a bullseye.

1. Simon Potter, Executive Vice President, Federal Reserve Bank of New York, “Money Markets at a Crossroads:  Policy Implementation at a Time of Structural Change,” Remarks at the Master of Applied Economics' Distinguished Speaker Series, University of California, Los Angeles, 5 April 2017, https://www.newyorkfed.org/newsevents/speeches/2017/pot170405

See also

Alexandra Altman, Kathryn Bayeux, Marco Cipriani, Adam Copeland, Scott Sherman, and Brett Solimine, "Investigating the Proposed Overnight Treasury GC Repo Benchmark Rates," Federal Reserve Bank of New York Liberty Street Economics (blog), 19 December 2016, http://libertystreeteconomics.newyorkfed.org/2016/12/investigating-the-proposed-overnight-treasury-gc-repo-benchmark-rates.html, and

James Egelhof, Antoine Martin, and Noah Zinsmeister, “Regulatory Incentives and Quarter-End Dynamics in the Repo Market” Federal Reserve Bank of New York Liberty Street Economics (blog), 7 August 2017, http://libertystreeteconomics.newyorkfed.org/2017/06/regulatory-incentives-and-quarter-end-dynamics-in-the-repo-market.html.

2. To see this, consider the details –
SR1M8’s final trade price indicated 1.845 percent as the market expectation of the arithmetic average level of SOFR for all 30 calendar days in the month (i.e., with the SOFR value for any Friday assigned to the ensuing Saturday and Sunday).  Similarly, for all published and known SOFR values from 1 June through 28 June, the calendar-day average was 1.825357 percent.  Thus, at SR1M8’s last trade, the implied market expectation of SOFR for Friday and Saturday, 29-30 June, was 2.12 percent = ( (30 days x 1.845 percent) minus (28 days x 1.825357 percent) ) / (2 days).

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