Sunday 22 August 2021

USD transition - quick spreads review

We still have roughly four months to go to the LIBOR transition. USD-LIBOR rates will still be published for 18 months after that, but the goal is to stop adding more LIBOR exposure from the beginning of 2022 onward.

A fallback mechanism for legacy LIBOR has been proposed by ISDA, based on a historical spread approach between the in-advance credit risky LIBOR and the in-arrears secured SOFR. The results of that historical spread computation has been announced on 5 March 2021. FOR USD-LIBOR-3M, the result was a spread of 26.161 basis points.

In USD, other mechanisms to replace LIBOR have been proposed. They include, among others (see this blog for more alternatives) Bloomberg BSBY, CME SOFR Term rates, and AMERIBOR. In this blog we propose recent historical data related to those benchmarks.

The data themselves are IBA USD-LIBOR-3M (2019-01-02 to 2021-08-20), Bloomberg BSBY 3M (2019-01-02 to 2021-08-20), SOFR Term rate 3M (2019-01-03 to 2021-08-19), SOFR compounded using ISDA mechanism (computed from Fed raw data) (2019-01-02 to 2021-05-17), and AMERIBOR 90D (2021-05-17 to 2021-08-20). The SOFR compounded time series are shorter by 3 months due to the in-arrears feature. The AMERIBOR 90D is published only since May this year. The time series are displayed in Figure 1.

Figure 1: Historical rates from beginning of 2019 to today

The drop of rates after COVID-19 pandemic spreads from Wuhan to contaminate the world is clearly visible in the graph at the beginning of 2020. The way the different rates reacted was different.

In Figure 2, we display the spread between LIBOR and the other rates. The BSBY spread has also jumped around that time, but remained contained. The Term SOFR had one big jump that can be interpreted as a market credit concern. At the opposite, the compounded in-arrears ISDA style had two large jumps, probably one due to the delayed nature of in-arrears and one related to credit.

Figure 2: Historical spreads to LIBOR from beginning of 2019 to today.

For the period in the graph, the statistics for the spreads are an average of 5 bps and a standard deviation of 4.6 bps for BSBY. For SOFR Term, the statistics are an average of 23 bps and a standard deviation of 21 bps. For SOFR in-arrears with ISDA methodology, the statistics are an average of 32 bps and a standard deviation of 30 bps. For AMERIBOR 90D, the statistics are an average of -1.7 bps and a standard deviation of 1 bps; the period of reference is very different and those statistics cannot be compared to the previous ones that are reported on a substantially more unstable period.

The fallback method is based on a fixed spread of 26.161 bps (and an implicit standard deviation of 0).

Added 2021-08-28: The spread versus term SOFR is presented in Figure 3. LIBOR, BSBY and Ameribor spreads varied widely but are all positive, except one date for LIBOR (2 March 2020). Over the last year, the spreads have been well below the ISDA spread fixing.

Figure 3: Historical spreads to term SOFR from beginning of 2019 to today.