Traders are positioning for a major shift in US funding markets: Daily trading volume in futures tied to the spread between the Secured Overnight Financing Rate (SOFR) and the Federal Funds Rate surged to a record 56,590 contracts on Tuesday. SOFR is the cost of borrowing cash overnight against US Treasury securities, and is closely tied to the Fed interest rate, making it one of the most important reference rates in global financial markets. Currently, SOFR is trading at 3.63%, just below the federal funds rate of 3.64%, a sign that cash is still plentiful in the financial system. Traders are now betting this spread will turn positive, expecting borrowing costs to rise above the Fed's rate, signaling that cash is becoming harder to access. This comes as the Fed is cutting its monthly Treasury bill purchases to $25 billion from $40 billion, while the Treasury is expected to increase the size of its T-bill auctions in the coming weeks to rebuild its cash balance toward a $900 billion target by the end of June. Both moves reduce the amount of cash available in the financial system, tightening liquidity conditions that have kept overnight borrowing cheap throughout 2026. Money market liquidity is set to shrink.(The Kobeissi Letter)