How SOFR Futures Repricing Relates to Short-Term Swaps and Treasuries
Summary
The document explains how a downward repricing in SOFR futures can relate to short-term dollar swaps and Treasury securities. The response says SOFR futures and swaps carry nearly the same rate exposure, with convexity adjustment creating a small first-order difference. It also links lower SOFR futures prices with lower prices, and therefore higher yields, for short-maturity Treasuries, since SOFR is tied to Treasury financing.
The relationship between swaps and cash securities does not guarantee an unchanged swap spread. Relative pricing can diverge when Treasury supply changes or when a specific note becomes unusually cheap to finance in repo. The response characterizes these relative effects as generally smaller than outright moves, but provides no empirical series or quantitative estimates. The discussion is a conceptual guide to rate-risk transmission and swap spread drivers, not a trading rule; actual repricing can depend on flows and instrument-specific conditions.
Key ideas
- SOFR futures and short-term SOFR swaps express closely related interest-rate risks, with a convexity adjustment between them.
- A downward repricing in SOFR futures generally corresponds to higher short-term swap rates.
- Treasury prices can fall alongside lower SOFR futures prices because SOFR reflects Treasury financing conditions.
- Treasury issuance and repo specialness can cause cash yields to move differently from swaps.
- Relative swap spread moves are described as small compared with outright rate moves, but are not ruled out.
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# SOFR Futures and impact on short-end dollar swaps and front-end notes # SOFR Futures and impact on short-end dollar swaps and front-end notes Suppose there is an exogenous event that triggers SOFR futures to be repriced lower. For simplicity, lets say the SOFR futures mostly impacted are whites/reds. Since USD swaps are priced off of the SOFR curve, would it naturally follow that 1y~2y swap rates will also be repriced higher? Additionally, given the discounting curve is repriced higher, would it follow that T-bill prices and 2y T-note prices would be repriced lower? And most importantly, what kind of impact would this have on the front-end swap spread (swaps vs cash yield)? I would imagine the degree of sell-off would be roughly equal, meaning that swap spreads would not change, unless there is a large difference between the flow for swaps vs flow for cash. ## Answer by dm63 (score 2, accepted) https://quant.stackexchange.com/a/78396 Yes to all of your questions. USD swaps vs SOFR futures express almost identical risks, except for the 'convexity adjustment' which is small to first order. Secondly, it is almost certain that on a day where sofr futures reprice lower, so will the price of 1 and 2 yr Treasuries (because SOFR is literally the financing rate for Treasuries). The third question, which probes further into this relationship, has some nuance. Sofr futures and Treasury yields can move slightly differently, due to various effects. For example, the Treasury unexpectedly decides to issue more 1yr and 2yr Treasuries -> they cheapen slightly versus Sofr. Or, the 2yr Treasury goes on 'special' in the repo market (meaning, it has a lower financing cost than other Treasuries) -> the 2yr note becomes more expensive relative to Sofr). But these relative moves tend to be small versus the outright moves in each instrument.
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