Market Insights – August 20, 2018

August 20, 2018 Chatham Financial

Big SOFR Issuance in the Summer Doldrums

View this week's rates.

Prior Week Summary

The most interesting news of the week was the large floating rate bond issuance that was hedged with a SOFR referenced basis swap. The World Bank is reported to have made history early last week by being the first issuer to hedge a floating rate bond deal with a swap tied to the new SOFR index. Students of history may recall that the World Bank is also commonly credited with being a counterparty to the first swap transaction in the early 1980s. It is encouraging to see how quickly the market infrastructure has developed in this space in anticipation of an increase in future demand. While this specific issuance, and its associated hedge, will mature before the big line in the sand at the end of 2021, it is still an important development for liquidity in SOFR futures and the development of a more robust risk management suite for SOFR linked debt. For a more detailed review of the SOFR landscape and the important risk management considerations for the transition, please refer to last week’s Balance Sheet Risk Management webinar available on our website.

In other news, the market was remarkably stable last week as yields across the Treasury curve ended the week within a basis point of where they began. The market is still expecting a 25 basis point rate hike at the September FOMC meeting, with near certain probability.

The Look Forward

The data calendar this week features updates on the state of the housing market, the minutes of the latest FOMC meeting, as well as updates on regional manufacturing activity.

 

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

 

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit http://www.chathamfinancial.com/legal-notices/.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions.

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