Wall Street strategists are divided over whether US funding markets will ease in the coming months, primarily due to increased volatility in recent overnight borrowing costs. A confluence of events is driving up ultra-short-term rates. The US Treasury is rebuilding its cash reserves by issuing more short-term debt, while the Federal Reserve is reducing its balance sheet, and usage of the central bank's key overnight lending facility has dropped to near-zero levels. All these pressures are keeping investors alert to potential sharp increases in borrowing costs.

Particularly concerning is the possibility that the Secured Overnight Financing Rate (SOFR) may rise further in the coming months, with disagreement persisting over whether funding costs will ease. Since late August, the SOFR benchmark rate has remained above the Fed's own target rate.

JPMorgan and Citigroup presented starkly contrasting views on September 12, recommending opposite trading strategies. JPMorgan believes investors are overestimating the risk of rising funding costs, while Citigroup expects current conditions to persist through the end of 2025.

**JPMorgan and Citigroup Diverge on SOFR vs Federal Funds Rate Outlook**

JPMorgan's team, led by Teresa Ho, expects overnight rates to ease before year-end and recommends traders buy December SOFR futures while selling equivalent federal funds futures. They anticipate the spread between SOFR (currently at 4.42%) and the 30-day federal funds rate (currently at 4.33%) will narrow in the final month of 2025. In the December futures market, this spread currently stands at approximately -7.5 basis points.

JPMorgan argues that bank reserves are not scarce, and the Fed's Standing Repo Facility (SRF) – which allows eligible institutions to borrow cash against Treasury and agency debt collateral at the upper bound of the policy target range – serves as important liquidity backstop support. They also note that Treasury's massive bill issuance following this year's debt ceiling resolution will slow down.

"We don't believe the recent uptick in secured overnight financing rates reflects an impending liquidity event and trust that banks will deploy reserves at the appropriate time," Ho stated in a report.

Meanwhile, Citigroup strategists led by Jason Williams believe funding costs will remain elevated through year-end. They recommend traders short December SOFR contracts relative to federal funds rates, expecting SOFR to trade about 4-5 basis points above federal funds on "good days," with fair value closer to -10 basis points.

"We do expect to see SOFR gradually climb in the coming months. Based on guidance from Treasury's August refunding meeting, they will increase some bill auction sizes in October, and we expect reserves to continue declining," Williams wrote in his report.

BI strategists Will Hoffman and Ira Jersey stated: "While the bulk of post-debt ceiling net issuance is behind us, the most severe funding pressures lie ahead – the Fed's market-based reserve scarcity comfort zone may be tested."

JPMorgan and Citigroup are not the only banks holding different views. Last week, Barclays exited its position of buying September SOFR relative to federal funds spread, a position established just a month earlier, noting that upward pressure on funding costs could become the "new default setting" as markets enter quarter-end.

At Morgan Stanley, strategists maintain that markets could ease as early as next month. They recommend going long October 2025 SOFR relative to federal funds spread, believing bank reserves remain adequate.

Bank of America closed its short position on the same tenor on Monday, citing the spread as "near fair value pricing." Analysts led by Mark Cabana now recommend going long January 2026 SOFR relative to federal funds rates, believing federal funds rates may gradually rise within their target range in early next year.

Nevertheless, JPMorgan and Citigroup agree on one point: the September 2019 scenario is unlikely to repeat, when funding costs spiked and the Federal Reserve injected tens of billions of dollars into funding markets.