The September SR3 futures contract closed Tuesday at an implied yield of 3.98 percent against a spot SOFR of 4.33 percent, a 35 basis point gap that prices a 24.5 basis point cut at the September 17 FOMC and a 97 percent probability the Committee moves 25 basis points. The December SR3 at 3.60 percent prices 73 cumulative basis points through the December 10 meeting, with the second 25 basis point cut priced at 54 percent. Every desk that carries a front-strip position runs the same conversion from futures price to cut probability. The mechanic is worth walking through cleanly because the SR3 language now sits inside every rates note the buy-side reads.

What SR3 actually is

SR3 is the CME ticker for the Three-Month SOFR Futures contract. The contract settles to the arithmetic average of the daily SOFR compounded over the reference calendar quarter. The September 2026 contract settles against SOFR fixings from June 17, 2026 through September 16, 2026. The contract price is quoted as 100 minus the implied yield, the same convention the eurodollar strip carried from 1981 through the SOFR transition in 2023.

The September SR3 at 96.02 implies a 3.98 percent yield on the underlying SOFR average across the June-to-September reference window. The December SR3 at 96.40 implies a 3.60 percent yield across the September-to-December window. The two contracts together price the entire path of the fed funds effective rate across the two FOMC meetings that land inside those windows.

The bridge from SOFR to fed funds

SOFR is a repo rate. Fed funds is an unsecured overnight rate between depository institutions. The two rates run inside a tight two to four basis point band in normal conditions because arbitrage between the two funding channels drives them together. The fed funds effective rate closed Monday at 4.33 percent and SOFR closed at 4.31 percent, a two basis point spread that has held inside the four basis point band for 97 percent of trading days across the 2023 to 2026 window.

The FOMC sets the fed funds target range, currently 4.25 to 4.50 percent with an IORB (interest on reserve balances) of 4.40 percent and an ON RRP rate of 4.25 percent. The IORB anchors the top of the range and the ON RRP anchors the bottom. A 25 basis point cut moves the target range to 4.00 to 4.25 percent, IORB to 4.15 percent, and ON RRP to 4.00 percent. SOFR and fed funds effective both track down inside the new range within one business day of the announcement.

The conversion from implied yield to cut probability

The September SR3 implied yield of 3.98 percent covers a 92-day reference window that includes 65 days at the pre-September 17 rate and 27 days at the post-September 17 rate. The pre-cut days carry the 4.33 percent spot SOFR anchor. The 27 post-cut days carry the post-decision SOFR level.

Setting the arithmetic average equal to the 3.98 percent implied yield gives one equation with one unknown (the post-cut SOFR level):

(65 x 4.33 + 27 x X) / 92 = 3.98

Solving: X = 3.13 percent, a 120 basis point move below the current SOFR level. That is far larger than a single 25 basis point cut, so the market cannot be pricing a certain 25 basis point cut. The 24.5 basis point figure comes from the probability-weighted version: the strip is pricing a 97 percent probability of a 25 basis point cut and a 3 percent probability of a 50 basis point cut, which produces an expected cut of 24.5 basis points and a post-decision SOFR level near 4.09 percent.

The December SR3 at 3.60 percent covers the September-to-December window and prices the cumulative expected path across both meetings. Subtracting the September-priced move gives the December-marginal move of 49 basis points across the two meetings, or 24 additional basis points at the December 10 meeting on top of the September cut. That is the number the 54 percent second cut probability comes from.

What the strip does not price

The strip prices the expected value of the FOMC decision, not the modal outcome. The 97 percent September cut probability at a 24.5 basis point expected move is consistent with a distribution that is heavily concentrated on the 25 basis point cut with a small right tail on the 50 basis point cut. A rising 50 basis point tail pulls the implied yield lower without changing the modal outcome. The CME FedWatch Tool decomposes the strip into meeting-by-meeting probabilities using the same math, and its numbers are the ones that populate the pre-FOMC framing across the sell-side.

The strip also does not price term premium on the two-year Treasury directly. The two-year at 3.52 percent sits six basis points below the December SR3 at 3.58 (yield-equivalent). That six basis point negative spread is the two-year’s own term premium contribution, currently reading close to the New York Fed ACM model estimate of the two-year term premium at negative four to negative six basis points.

What moves the strip inside the pre-CPI window

Inside the seven-session pre-CPI window that closes with the June CPI landing at 8:30 ET Wednesday July 15, the strip carries a plus or minus six basis point distribution on the cumulative September-to-December expected cut path across the 2015 to 2025 sample. The single largest release-day contributor is the CPI print itself, which historically moves the front strip by eight to fourteen basis points on a two-tenths surprise. The pre-release contributors sit in the two to three basis point range, and Fed-speaker remarks inside the pre-blackout window run at the two basis point range on the release-morning tape.

The strip that opens Wednesday morning at September at 3.98, December at 3.60 is the position the desk carries into Waller at the Peterson Institute at 10:00 ET and the G.19 May consumer credit at 3:00 PM ET. The two-year at 3.52 is the two-year the strip is pricing against, and the 97 percent September plus 54 percent December configuration is the outcome the strip will reprice off across the seven sessions to the CPI landing.

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