SOFR basis blows out amid CCP discounting changes
Rate cuts may have exacerbated discount risk as basis swap opt-outs move deeply in-the-money
The price difference between longer-dated interest rate swaps benchmarked to the secured overnight financing rate (SOFR) and the effective federal funds rate (EFFR) has tripled since mid-June.
At 30-year maturities the SOFR-EFFR basis jumped from two basis points on June 15 to a high of 7.8bp on July 21, according to Bloomberg data. The basis now sits at 6bp.
Interest rate strategists say the widening is likely a result of dealers and hedge funds positioning for an expected spike in the SOFR
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