Will the Fed Officially Announce the End of QT Tomorrow Evening?

Signs indicate that a sizable block trade emerged in the US interest rate market late last week, seemingly positioning for the Federal Reserve potentially announcing the end of its balance sheet reduction plan (i.e., Quantitative Tightening, or QT) soon.

Data from CME Group showed a block trade on Thursday involving 40,000 November contracts, betting that the average Secured Overnight Financing Rate (SOFR) for November would be less than 9 basis points above the expected federal funds rate.

Data shows SOFR is currently 4.24% – this rate represents the overnight borrowing cost for short-term cash collateralized primarily by Treasury securities, reflecting financing costs in the overnight repo market. The federal funds rate is currently 4.11% – this is the cost of unsecured overnight loans banks charge each other to meet reserve requirements.

Given that the trade's risk exposure is almost entirely concentrated on the spread of the one-month rate, the size of this position can be considered extremely large – its interest rate sensitivity is equivalent to holding $2 to $3 billion in 10-year Treasury notes.

In essence, this trade is betting that if the Fed announces a tapering of its QT plan at its two-day meeting this week and implements a widely expected 25 basis point rate cut, the average November SOFR would fall to 3.95% or lower, while the federal funds rate would be at 3.86% (4.11% - 0.25%) or higher.

This contrasts sharply with forward market expectations – one-month forward contracts on Friday showed traders expect SOFR to be 10 basis points above the federal funds rate by the end of November, which would be a record spread level, indicating that repo financing conditions remain tight.