Finance


The New York Federal Reserve launched a benchmark U.S. rate on Tuesday to potentially replace Libor, and market participants hope it will prove more reliable after a long and complex switchover.

The Secured Overnight Financing Rate (SOFR) set at 1.80 percent. SOFR is based on the overnight Treasury repurchase agreement market, which trades around $800 billion in volume daily.

Publishing the rate is the first step in a multi-year plan to transition more derivatives away from the London interbank offered rate (Libor), which regulators say poses systemic risks if it ceases publication.

Analysts have struggled to explain a recent jump in Libor, which has reached nine-year highs <USD3MFSR=X> even as bank credit quality is seen as solid.

Increased issuance of short-term Treasury securities and declining demand for credit due to tax reforms are deemed the most likely factors. A decline in interbank lending has reduced the robustness of the rate, which is sometimes estimated rather than based on actual transactions.

It’s going to be based on a very, very robust set of transactions. I dont think a lot of the issues and unknown volatility around Libor is going to exist, said Blake Gwinn, an interest rate strategist at NatWest Markets in Stamford, Connecticut.

Instances like what weve been going through this past month where its not even a clear cut bank credit issue or a dollar funding issue per se. Its kind of got everybody scratching their heads trying to figure out why its doing what its doing, Gwinn said.



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