Funding Rate Compression

Definition ∞ Funding rate compression occurs when the difference between positive and negative funding rates in perpetual futures markets narrows significantly. This phenomenon indicates a reduction in the directional bias of leveraged positions, suggesting a more balanced market sentiment. It typically follows periods of extreme funding rates, as arbitrageurs and market forces work to equalize the premiums. This state often signals a decrease in speculative pressure.
Context ∞ Market commentators frequently discuss funding rate compression as an indicator of stabilizing market conditions after periods of high volatility. News reports might reference this metric when assessing whether a market has absorbed recent price movements and is entering a consolidation phase. This compression suggests a reduction in the likelihood of immediate, large-scale liquidation events.