In the financial world, the year has been marked by some truly extraordinary movements, with one of the most remarkable being the shift observed in the short-term interest rates, particularly reflected in the SOFR (Secured Overnight Financing Rate) futures contracts.

A significant shift of approximately 50 basis points (bps) has been seen since January, a testament to the underlying volatility and the market’s response to broader economic indicators and policy shifts. This kind of movement suggests that the positions held by major trading banks and institutional investors have been closely aligned, as the market trended in a fairly consistent direction.

Many of these institutions and traders likely engaged in what’s known as “flattener” trades. This involves betting that the spread between short-term and long-term interest rates will decrease. For those who have been monitoring the SOFR futures, specifically the U4H6 contracts, it has been a particularly lucrative time.

Recently, a strategy to take profit on two-thirds of the SOFR U4H6 flatteners has been implemented as the rates hit a low of around -125 bps. At this level, the risk-to-reward ratio (R:R) has become less appealing. Although steepeners—bets that the spread will increase—remain fundamentally unfavorable, the decision to secure gains from what has evolved into a very successful trade appears prudent.

This movement suggests that despite steepens being viewed as fundamentally disadvantageous and potentially representing a “trapped position,” there’s still a cautious approach to locking in profits from the flattener trades. This strategy underlines the importance of timing and market perception in trading futures, especially in the face of increasingly complex market dynamics.