Thursday 4 April 2024

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:

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

The page is available at:

Wednesday 20 March 2024

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.