What does the chart display? The chart title is * * "1M SOFR (SR1 | SR1) vs. Fed Funds (OZQ | ZQ) Spreads" * *, spanning from December 13, 2024 to September 22, 2025. It plots the difference (or spread) between two key interest rates: -* * SOFR (Guaranteed Overnight Financing Rate) * *: the benchmark interest rate issued by the Federal Reserve Bank of New York, which is based on overnight loans backed by US treasury bond bonds, reflects the cost of overnight borrowing in a safe environment. -* * Federal Funds Rate * *: The target interest rate for overnight interbank loans set by the Federal Reserve System, often used as a benchmark for short-term interest rates. The spread calculation is * * SOFR minus the federal funds rate * *, in basis points (bps), where 1 basis point equals 0.01%. The y-axis ranges from -10.00 to -4.00 basis points, with the line trending downwards over time, indicating that the negative spread is expanding. Key observations A post from CME Group's interest rate account (@ Interest_Sates) states that as of September 22, 2025, the interest rate spread has reached a new low of * * -9 basis points * *. This means that the SOFR rate is 9 basis points lower than the federal funds rate. Since the beginning of 2025, the interest rate spread has shown a downward trend, with a sharp drop in September, indicating a change in market expectations. What does this mean? 1. Interpretation of Negative Interest Spread: -Negative spread (SOFR<federal funds rate) indicates that the guaranteed overnight borrowing rate (SOFR) is lower than the unsecured overnight rate (federal funds rate). This is not common because secured loans (loans that support SOFR) are generally considered to have lower risks, so theoretically, interest rates should be lower. The reversal situation indicates that market dynamics may be at work, possibly due to supply and demand imbalances in the repo market or expectations for Federal Reserve policy. 2. Market Expectations: -The post mentioned that the drop in interest rate differential to -9 basis points "indicates the expectation that overnight financing costs will continue or increase by the end of the year or beyond". The term 'year-end' here may refer to December 2025 or a key policy turning point. This may mean that traders anticipate that the Federal Reserve may raise the federal funds rate, or that liquidity in the financial system may tighten, resulting in an increase in unsecured borrowing costs relative to secured interest rates. 3. * * Historical Background * *: -The chart shows that the interest rate spread fluctuated throughout 2025, mostly between -4 and -6 basis points, with a sharp decline in September. This fluctuation may reflect seasonal factors (such as year-end liquidity demand) or a response to economic data and Federal Reserve announcements. Why is this important? -For traders and investors: The negative expansion of interest rate spreads may indicate pressure on the financial system, especially in the repo market where SOFR operates. This may affect the pricing of derivatives, loans, and other financial instruments linked to these interest rates. -For the economy: If financing costs remain high, it may indicate tightening monetary conditions, which could slow down economic activity if the Federal Reserve maintains or raises interest rates. -For policy makers: The Federal Reserve may closely monitor this interest rate spread as it may affect decisions on interest rate adjustments or liquidity injections. technical details -The data comes from CME Group's QuikStrike platform, tracking futures contracts (e.g. SR1 represents SOFR, OZQ/ZQ represents Federal Funds). The 1-month (1M) time frame indicates that this is based on contracts for the next month, reflecting market expectations for the next month. -The zoom options (1M, 3M, 6M, etc.) allow for different temporal perspectives, but the current view (- Z5) may refer to the contract in December 2025, consistent with the mentioned "year-end". Concise Key Points Imagine SOFR and the federal funds rate as two brothers in a race. Usually, the Safer Brothers (SOFR) will lag slightly behind (with lower interest rates) because it carries less risk. But now, the safer brothers are falling further behind (negative -9 basis points), and the market believes that the higher risk brothers (federal funds rate) may soon accelerate due to rising costs or Federal Reserve action. The widening interest rate differential in September 2025 is a major event, which may mean future borrowing conditions ————————————— Hey, we'll study it tomorrow