Major Banks Collectively Bullish on SOFR Spreads as Funding Rate Futures Trading Volume Hits Record
Alina Collins
Citi, Wells Fargo, Barclays, and BofA have all urged clients to trade the July SOFR–fed funds spread, driving a record 112,590-contract single-day turnover — the shared thesis points to one thing: Treasury bill supply ramps back up in July.
What trade just went parabolic?
July futures tied to SOFR — the secured overnight financing rate, essentially the overnight borrowing cost collateralized by Treasuries — and the effective fed funds rate saw open interest and volume surge simultaneously.
Monday's spread between the two — the "basis" — hit a single-day record of 112,590 contracts, including one 60,000-contract sell block; Wednesday saw notable buying.
This means → the biggest Wall Street desks are piling into the same trade, betting SOFR will rise relative to the fed funds rate.
Why are they all bullish on the SOFR spread?
The logic fits one sentence: July T-bill supply expands → more bills flood the market → SOFR pushed higher → the spread widens.
In plain terms = T-bills are like goods on a shelf — more supply drives prices down and yields up. SOFR is priced off Treasury collateral, so when bill yields rise, SOFR follows.
Citi strategists estimate that, excluding Fed holdings, outstanding bill supply will climb from roughly $6.3 trillion now to $6.5 trillion by end-July — a net increase of about $200 billion in one month.
What does money-fund seasonality have to do with it?
Wells Fargo strategist Angelo Manolatos flagged an extra variable: over the past three years, money-market funds averaged just $39 billion in net July inflows — far below August's $113 billion.
This means → July is precisely the month when money funds are cash-light and least able to absorb a surge in new bill supply.
In plain terms = fewer buyers, more paper. Cash may have to rotate out of reverse repo and other money-market instruments to take down the bills, pushing SOFR higher still.
How do the individual trades differ?
Citi recommended shorting the August basis last week, entry at −1.5 bps, target −4 bps.
BofA had already projected that July bill supply would lift SOFR.
Barclays took the opposite side — arguing the market has over-priced the supply shock and advising clients to fade the trade.
This reflects a consensus on direction but a split on degree: Barclays is essentially betting the others have pushed too far.
What is the broader rate backdrop?
The Fed's policy-rate target range sits at 3.50%–3.75%, unchanged since last December.
Year-to-date, SOFR has averaged roughly 1–2 basis points above the fed funds rate, printing around 3.64%.
This means → in a window where rates are on hold, tiny moves in short-term funding costs become the tradeable edge — the banks are fighting over a few basis points of spread, with July month-end settlement as the scoreboard.
Content is for reference only, not financial advice.