The financial markets have recently seen an uptick in interest around SONIA/SOFR cross-market spreads. For those closely following these developments, there are some key movements and considerations worth highlighting.

One of the spreads attracting attention is the SFRU4-Z4 3-month futures spread versus the SFIZ4-U5 9-month spread, which traded flat on Tuesday. This reflects the ongoing trend between the UK and US markets. Picking an optimal entry point remains a challenge, especially with the relatively small trading volumes observed, despite the heightened interest.

A critical aspect of this dynamic is the pricing of the December and January Federal Reserve meetings in isolation, which stands at flat when compared to the first three quarters of 2025 Bank of England (BoE) meetings. This is noteworthy because if the Fed’s December and January meetings materialize with around 70 basis points of additional cuts—following the start of an easing cycle in September—it could signal broader economic concerns.

In such a scenario, holding a position with exposure to UK risk for nine months (given the 3:1 duration ratio) might prove advantageous. Essentially, the strategy here hinges on the belief that UK risk could be a safer bet or at least offer better returns if the Fed’s actions reflect deeper underlying economic issues.

While the flow of trades has been modest so far, the situation warrants close monitoring, particularly as we approach the end of the year. The relationship between the US and UK central bank policies will be pivotal, and for those in the market, being strategically positioned could offer significant advantages as these developments unfold.

The evolving landscape of SONIA/SOFR spreads is one to watch. Although entry points are tough to pinpoint and trading volumes remain low, the potential implications of Fed and BoE decisions on these spreads could provide opportunities for savvy investors.