Insufferable SOFR, Suffering

Sometimes, the government will tell you a lot when it really doesn’t want to tell you anything. It’s not what they say, but what they don’t. In the case of the Treasury Department, there was a small, seemingly nondescript morsel buried down underneath the rest of its more immediately consequential next-quarter projections. While focused, quite rightly, on the scaling back of bill auctions, and holding the line with bonds and notes, the refunding statement curiously punted on SOFR of all things.

No decision has been made by Treasury regarding potential issuance of an FRN linked to the Secured Overnight Financing Rate. Treasury continues to actively explore the possibility of issuing such a product and will provide ample notice to market participants if it chooses to move forward.

Right now, since 2014, the federal government also sells floating-rate notes (FRN) that are priced and indexed to the discount rate applied to 13-week (3-month) Treasury bills. SOFR, the Secured Overnight Financing Rate referenced above, is an amalgamated rate pieced together from various parts of the domestic monetary system by other regulators who have quite well established only their dislike of LIBOR. Clearly, pressure is being applied to pump up SOFR to make it seem more desirable than it really is, pressure that’s understandably (as you’ll see) being resisted.

In the past, certain bank regulatory agencies have declared LIBOR a fraud; even when not specifically citing the scandal surrounding it. It is a made-up interest rate on its good days, a survey of foreign banks asking them what they might get charged (own-rate) if they were to borrow unsecured US dollars offshore.

That last part is what this is really about; can’t have the world asking the uncomfortable questions about why the world’s key interest rate-setting the basis for the entire global financial system is derived from conditions in the dollar system which happens to exist outside and apart from the Federal Reserve’s mandates.

However, given just how vital LIBOR is they can’t just kill the thing outright in one regulatory stroke (though I’m sure the thought has been tempting). Instead, US central bank officials convened a group of highly distinguished experts, the Alternative Rates Reference Committee, and in 2014 came up with SOFR for the explicit purpose to put LIBOR out of business.

What Treasury has said – not just in the last quarterly refunding, but prior ones, too – is that they aren’t ready to help bank regulators – the Fed, OCC, and FDIC – further legitimize SOFR. Unlike these others, Treasury seems to understand the downright idiocy behind the whole affair.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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