Rising costs prompt US borrowers to embrace compounded SOFR
Sophisticated firms with term SOFR loans increasingly willing to run basis risk to cut hedging costs
A small but growing number of US borrowers and regional banks are opting to offset interest rate risks with the overnight compounded version of the US secured overnight financing rate (SOFR). While it sees them wearing the basis risk, it allows them to avoid the high costs of hedging perfectly with the term version of the benchmark.
Since term SOFR’s emergence as the mainstay of US lending, borrowers have faced additional costs when hedging a floating rate loan using a pay-fix swap linked to
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