Citi's Kang Writes "SOFR So Good"
Citi's Steve Kang writes in a brief entitled, "SOFR So Good," "On Tuesday the NY Fed started publishing the Secured Overnight Financing Rate (SOFR), which is now published near 8am each morning for the previous day. SOFR is an overnight Treasury repo rate based a volume weighted median of tri-party, GCF, and bilateral rates. Going forward, the goal is for SOFR to be LIBOR's replacement, in the far future, as the benchmark for interest rate derivatives.... The Fed also introduced BGCR, which excludes FICC bilateral trades from SOFR, and also TGCR, which further excludes GCF repo (i.e. just tri-party). Large dealers tend to be net borrowers in Tri-party and net lenders in bilateral repo and GCF. Tri-party repo rates (TGCR) serve the market in being about the lowest o/n wholesale money rate – and it is where the money market funds tend to lend to a select group of large dealers." The update adds, "SOFR made its debut this Tuesday trading around flat to IOER and TGCR traded around 5bp below them.... It was an interesting time to debut SOFR, as repo rates are trading in a different regime with a dramatic increase in T-bill supply. There has been a +$320bn net increase in supply from early-February (when the debt ceiling was suspended), which was the largest 2-month change in T-bills outstanding since the crisis.... So far the upward pressure from bill yields is felt on all market-based o/n rates with investors, with RRP as an alternative investment vehicle (such as tri-party and by extension GC repo and fed funds rates). With other MMF o/n offering more value, the usage of the Fed's RRP facility plummeted to paltry 5bn this month."
