SOFR Futures

What Are SOFR Futures?

SOFR futures are CME-traded futures contracts that settle on the Secured Overnight Financing Rate (SOFR). They were launched in May 2018 as the successor to eurodollar futures during the LIBOR-to-SOFR transition. CME offers two main contract types:

• 1-month SOFR futures (SR1): settle on the simple arithmetic average of daily SOFR readings during the contract month. Each contract has a notional of $5,000 per basis point.
• 3-month SOFR futures (SR3): settle on the daily-compounded SOFR over a 3-month reference quarter. Each contract has a notional of $25 per basis point. SR3 is the direct successor to eurodollar futures.

Contracts are available for many quarterly expirations going out 10 years, providing a deep forward curve.

Why They Matter for Markets

SOFR futures are the primary global instrument for short-term USD interest rate exposure. Trillions of dollars of daily notional flow through them. The forward curve they imply is the canonical visualization of "where the market thinks rates are going".

The CME FedWatch tool, derived from SOFR (and previously fed funds) futures, publishes implied probabilities of FOMC actions at each scheduled meeting. These probabilities are the most-cited single signal in financial media about Fed policy expectations.

How to Read the SOFR Curve

Near-term implied rates. The SR1 futures contracts for the next 3-6 months reveal the market's expectations for the next FOMC meetings. A SR1 price implying a rate 25 bp below the current SOFR signals the market expects a cut at the upcoming meeting.

Forward curve shape. The SR3 curve out 1-2 years reveals the expected policy path. A steeply downward-sloping curve signals expected cuts; an upward-sloping curve signals expected hikes; a flat curve signals expected hold.

Implied terminal rate. The lowest point in the SOFR forward curve is the market's expected terminal rate (where the Fed is expected to settle). The path from current SOFR to terminal SOFR is the expected easing or tightening cycle.

Risk-neutral vs physical probabilities. SOFR-implied probabilities are risk-neutral (they include risk premium). Physical probabilities (what the market actually thinks will happen) typically differ by 5-15 percentage points at each meeting.

Historical Context

SOFR futures were launched May 2018 with limited initial liquidity. The market gradually migrated from eurodollar futures through 2018-2022, with SOFR futures volume exceeding eurodollar volume by mid-2022. The final eurodollar futures contracts settled in June 2023.

Through 2024-2025, the SR3 forward curve has captured the Fed's transition from peak rates (5.25-5.50% in mid-2023) to the cutting cycle that began September 2024 (target 3.50-3.75% by early 2025). The implied terminal rate has fluctuated between 3.0% and 3.5% as the market debates how far the cuts will go.