2018-04-10

SOFR one week on

The Secured Overnight Financing Rate (SOFR) has now been published by the Fed New York for a week. Time for an early analysis.

The data published does not only consists of the benchmark rate itself which is a median rate of the data collected, but also the 1, 25, 75 and 99% percentiles. From that information, we can see that 50% of the rates captured are outside a 10 basis points band around the published rate. For the Effective Fed Fund Rate (EFFR), the 50% band is only 2 bps.

What is the origin of this larger dispersion of rates for the SOFR rate? Maybe the daily publication of the figures will increase transparency in that particular market which will lead to the narrowing of the dispersion? We will see if this is the case in a couple of months.

Another type of explanation for a larger diversity of rates could be the existence of a bid-offer in the SOFR underlying data. The Effective Fed Fund Rate is calculated on overnight federal funds transactions, which means that the transactions used are interbank transactions, transaction between are relatively homogeneous set of participants. On the other side, the SOFR transactions also include trades with clients and market-takers. The set of participants is less homogeneous. Could this 10 basis point difference be explained by bid-offer?

On a different subject, note that between the 3 April and the 4 April, the SOFR went down by 9 basis points while the EFFR was unchanged; the spread between SOFR and EFFR decreased by 9 basis points.

The spread between SOFR and EFFR is currently at 6 basis points. The secured rate still well above the unsecured rate!

The page on the Fed New York website with data related to SOFR is:
https://apps.newyorkfed.org/markets/autorates/sofr

The page on the Fed New York website with data related to Federal Funds Effective Rate is:
https://apps.newyorkfed.org/markets/autorates/fed%20funds

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