Workshop on multi-curve framework - Warsaw - 5/6 December 2024

Marc will present a two-day workshop on multi-curve framework on 5 and 6 December in Warsaw.

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More details can be found on the LinkedIn page related to the workshop. There are still seats available for that workshop organised by CEETA.

Et tu, ESTR!

In previous blogs, we reported the return of the month end SOFR volatility with regular increase of the spread above Fed Fund target. We have updated the graph and the data. As seen in Figure 1, the month-end volatility continues to be visible almost every month with a larger impact at the latest quarter end.

Figure 1: Spread over target rate for overnight benchmarks.

Over the reported period the average spreads of “normal” days are 7.08 bps. We report below the average spread above that average for “special” days:

Day of the month	Spread (bps)
1st	4.20
2nd	2.35
15th	0.30
Last	3.15

Based on our blog and presentations, it is natural to ask if something similar exists in other currencies. We have run an analysis for EUR. There the results are somehow the opposite. The last days of the month usually see a lower rate. This is reported in Figure 2. The numbers reported are the difference between the last business day of the month rate and the average of the two adjacent rates (second last day of the month and first day of the next month). The average decrease of rate is 1.13 bps with all month but one lower.

Figure 2: ESTR decreased rate at month end.

Benchmark page on our site

One very useful document related to interest rate market is Marc’s “Interest Rate Instruments and Market Conventions Guide". Its latest version was published more than 10 years ago as an OpenGamma Quantitative Research document. It can be found on SSRN at https://ssrn.com/abstract=2128257.

Over that time interval the interest rate market conventions have changed, in particular in relation to benchmarks. We are planning to update the guide and we will post here a link to the new version.

In the mean time we have added a benchmark page on our web site with a list and short descriptions of overnight and IBOR-like benchmarks: https://murisq.blogspot.com/p/conventions.html. We will do our best to maintain it up-to-date.

Don't hesitate to contact us if you think there are "glitches" in the list or to propose new information.

AMERIBOR is also alive!

A couple of days ago, we published a blog titled "SOFR is really alive again!" showing the return of (small) volatility of the SOFR spread above the Target rate. This small volatility was opposed to the dead spread of EFFR.

A natural question at the reading of the blog has been "What about AMERIBOR?".  The third overnight benchmark in the USD market is more directly linked to the actual deposit market without manipulation. 

The spread of AMERIBOR above the target rate is reasonably volatile. A graphical representation is proposed below.

Figure 1: Spread over target rate for three USD overnight benchmarks.

SOFR is really alive again!

In a post titled "Is SOFR alive again?" a couple of month ago, we were wondering if the month-end and mid-month volatility of SOFR was back or if it was only a temporary effect linked to the year-end. The answer seems to be that the month-end effect is really there again but the mid-month effect not.

The effect is represented graphically below. The graphs displays the spreads between the 2 main overnight rates in USD (EFFR and SOFR) and the US Target rate lower end of the range. The EFFR rate does not show any variation at 8 bps every day. The SOFR is usually slightly lower at 6 or 7 bps, but around month-end shows "burst" up to 15 bps.

Figure 1: Spread over target rate for overnight benchmarks.

Over the last 10 months displayed in the above figure, the mean spread for the “rest” bucket is 6.48 bps. For the other periods, we measured the spread above that mean (i.e. spread of spread). The results are

Day of the month	Spread (bps)
1st	3.32
2nd	2.32
15th	-0.10
Last	2.08

The feature should probably be incorporated into the SOFR curve calibration when dealing with large volume of SOFR-linked products (OIS, CSA collateral, SOFR futures, etc.). A mechanisms to incorporate this feature in curve calibration is proposed in Chapter 5 of Marc's multi-curve framework book (note: a new version is in progress).

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Note that CME SOFR term rates do not include this feature in their "interpolation" mechanism. The CME SOFR term rates are probaly not fully suitable for precision hedging of the SOFR risk.

New offices: work (almost) in progress

muRis_Q Advisory is happy to announce the launch of the work on its new offices.

The new offices will be located in the municipality of Namur in a building of the late 19th century. The heavy work will start in October.

The offices will be divided in two parts: a “communication office” and a “research and development office”. The former will be used for client reception and online meetings. The latter will be organised as a library with reading desks and large bookshelves with relevant quantitative finance, mathematics, computer science and economic literature.

We will post pictures of the new premises once the transition is over.

The new office's floor plan

Marc's multi-curve book: new edition in progress

It has been 10 years since Marc published the first edition of his book Interest Rate Modelling in the Multi-Curve Framework: Foundations, Evolution and Implementation. He is now preparing a new edition as announced on his personal blog:

https://multi-curve-framework.blogspot.com/2024/04/multi-curve-book-new-version-in-progress.html

As a preview of the book, we have created a new page on muRis_Q Advisory site with the content of the "convention" appendix.

The page is available at:

https://murisq.blogspot.com/p/conventions.html

Is SOFR alive again?

The title may sound prosperous as SOFR as been the main benchmark in USD interest rate (at least in term of PV01) for more than six months.

SOFR has been manipulated (Note: "manipulate: to use something, often with a lot of skill", Cambridge Dictionary ) by the Federal Reserve Bank by intervening in the repo market, up to USD 1,000 billions a day. If you go back to the last quarter of 2019, there were large variations in SOFR between the “normal” days and the days influenced by government actions (month end for balance sheet measurement and 15th of the month for tax payments). After the Fed interventions, the market impact of those influences disappeared; the public sector compensated one intervention by another.

This blog title refers to that “life” of SOFR, its reaction to external influences. In 2019 we proposed a blog on how to include that seasonal life into curve calibration. After a couple of years where the SOFR daily reading (above the Fed target rate) were completely flat, there has been a little bit of action over the last months. Figure 1 represents the spread of overnight benchmarks (SOFR and EFFR) above the target rate. EFFR is completely flat at 8 bps. SOFR shows more life. The days have been divided in a certain number of buckets: 1st (business) day of the month, 2nd day of the month, 15th of the month, last day of the month, (overnight period containing the mentioned dates) and the rest.

Figure 1: Spread over target rate for overnight benchmarks.

Over the last 6 months displayed in the above figure, the mean spread for the “rest” bucket is 6.42 bps. For the other periods, we measured the spread above that mean (i.e. spread of spread). The results are

Day of the month	Spread (bps)
1st	2.92
2nd	2.75
15th	0.08
Last	2.08

There is indeed some impact around month-end/start. It is largely impacted by year end. We will see if the impact continues through the year.