What happened: Global issuance of SOFR-referenced debt has exceeded $250 billion, with the Federal Home Loan Bank System accounting for more than 50% of that amount. Large multinational banks have been accelerating the issuance of SOFR debt and community banks have issued subordinated debt issues with ﬁxed to ﬂoating structures, using SOFR as the reference index for the variable-rate period. The U.S. Treasury has requested information from market participants to gauge interest in a ﬂoating-rate note referencing SOFR. SOFR options began trading and futures activity and participation continues to increase.
Implications: As the cash and derivatives markets for SOFR keep evolving and growing, participants of all shapes, sizes and business models can prudently reduce their exposure to LIBOR, while still meeting the ongoing asset and liability management needs of their balance sheet.
The growth in the market for SOFR-related corporate debt is a positive development for investors like insurance companies who rely heavily on corporate bonds in their investment portfolio. The use of SOFR in subordinated debt issuance affords community banks the ability to optimize their capital structure with their targeted interest rate exposure.
A SOFR-linked Treasury note could have a signiﬁcant positive impact, spurring derivatives activity and serving as a benchmark for other debt issuers.
Increasing market adoption has allowed FHLBank Boston to develop new products such as the SOFR-Indexed Advance, as well as work towards reintroducing popular advance solutions like the Flipper Advance, without any reliance on LIBOR.
FHLBank Boston does not act as a financial advisor, and members should independently evaluate the suitability and risks of all advances.