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Is SOFR Superseding LIBOR as the Chosen One in the Bond Market?


May 12, 2022
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With the cessation date of the staying USD LIBOR (London Interbank Offered Rate) settings a year away, it is unexpected to see just how much work is yet to be done and how various market gamers are responding to USD LIBOR and its follower, the Protected Overnight Funding Rate (SOFR). While market individuals promote the advancement of a SOFR-linked derivatives market, the bond market is gone over less regularly. Nevertheless, financial obligation issuance is likewise a vital market sign when assessing a benchmark rate like SOFR.

For the analysis revealed here, we gathered brand-new financial obligation issuance information from January 2019 to January 2022, assembled by provider type, voucher structure, and maturity term:

  • Provider types: business, company, and sovereign
  • Voucher structures: repaired rate and drifting rate (LIBOR, SOFR, Term SOFR, SOFR Average, other alternative rates (efficient federal funds rate (EFFR), Bloomberg Short-term Bank Yield Index (BSBY), American Interbank Offered Rate (AMERIBOR)), and stepped voucher)
  • Maturity terms by years to maturity (YTM): short-term (0-2), medium term (2-5), and long term (5+)

The information suggests that SOFR financial obligation problems are increasing, particularly considering that mid-2021, thanks to the SOFR First effort. Nevertheless, the brand-new problems reveal a various landscape from the LIBOR ones, which might suggest the future of the SOFR bond market.

Business Providers Think Twice to Broaden Maturity Depth of SOFR FRN

We’re seeing a sluggish shift of brand-new business issuance far from LIBOR and proactive activity in different alternative rates. Overall problems and drifting rate note (FRN) problems have actually stayed stable over the last few years; SOFR problems in 2021 have to do with 8% more than LIBOR problems in 2019 in regards to problem quantities. That stated, business companies are actively checking out various referral rate types when releasing FRNs. Those alternative referral rates are generally embeded in advance, compared to the set-in-arrears SOFR. As displayed in Figure 1, Term SOFR problems represent around 7% of the overall FRN problems each year. The problem quantities of FRNs referencing other alternative rates were $1-2 billion in 2020 and 2021, respectively.

As displayed in Figure 2, each maturity term represents an equivalent share of overall problems in the LIBOR case. On the contrary, brand-new SOFR problems seem mainly short-term. Long-lasting SOFR problems represent about 19% of the overall, yet the majority of them grow in less than ten years. There have actually been ask for a set-in-advance SOFR-based index considering that the early phase of the shift far from LIBOR. Among the apparent factors for this is that market individuals have actually grown familiar with the set-in-advance LIBOR in regards to innovation, operations, and trade. Apart from the appeal of setting ahead of time, there are a number of descriptions for the issuance landscape:

  1. Providers are not encouraged to provide longer-tenor bonds. With the existing state of the economy and increasing inflation, it is riskier to introduce longer-tenor bond offers as financiers require greater yields when inflation is increasing. Nevertheless, Figure 3 programs that the yield of longer-maturity bonds is much less delicate than the yield of short-maturity bonds. In addition, a Federal Reserve tightening up policy might cause an inverted yield curve. Figure 4 recommends that U.S. treasury curves have actually begun to slope downward on the long end considering that January 2022.
  2. The schedule of other alternative rates broadens choices on financial obligation issuance, while casting unpredictability on the benchmark rate in the long run. Besides the more popular derivative-derived Term SOFR and SOFR Average computed on historic rates, there are EFFR, BSBY, and AMERIBOR with about $1.3 billion in mid-to-long-term bonds released in 2021. The problem quantity is far less than that of SOFR, however the pattern has actually been to provide longer maturity bonds connected to Term SOFR.
  3. There is still a long method to precede reaching a liquid SOFR market. Using SOFR in rates of interest swaps has actually been increasing over the in 2015 with broad offerings on maturity terms from months to 30+ years, however we do not see the very same maturity depth in bond offerings. This is fascinating as the rates of interest swaps are frequently utilized as a hedging tool versus the threat direct exposure in bonds. The absence of liquidity in the long-lasting bond market can not attend to a significant SOFR bond yield curve and term premiums, even more dissuading companies and financiers from getting in the marketplace.

As an outcome, Term SOFR fills the requirement of long-lasting bonds to some degree. Nevertheless, Term SOFR will not be an ideal supplement to the SOFR bond maturity spectrum. As we have actually formerly gone over, paradoxes develop as market individuals intend to establish both SOFR and Term SOFR in money and derivatives markets.




Firm Issuers Moving Far From LIBOR

Firm companies took advantage of SOFR financial obligations as early as 2019, and the problem quantity peaked in 2020. SOFR problems fell in 2021, in addition to the general size of FRN issuance.

LIBOR problems have actually efficiently been up to absolutely no considering that 2019, showing that U.S. companies are leading the shift motion. Nevertheless, the desire to provide SOFR financial obligations has actually damaged, even with a relative rise in releasing stepped discount coupons and other alternative rates. The absence of clearness on Term SOFR has actually caused doubt on SOFR problems. Something that a stepped voucher bond and a LIBOR bond share is that the voucher rate is embeded in advance. The stepped voucher is the only voucher type that reveals a boost in problem quantity, while overall FRN problem amounts reduced by about 70% from 2020 to 2021. With Term SOFR revealed and formally backed in late 2021, we’ll keep viewing the company issuance for 2022– this might end up being a competitors in between SOFR and Term SOFR.


Sovereign Issuers Aloof Towards SOFR Issuance

Sovereign companies are plainly reluctant about referencing SOFR. Overall SOFR issuance from 2019 to January 2022 was simply $0.5 billion, compared to LIBOR issuance of around $4 billion. With LIBOR problems concerning an end, there has actually been a boost in stepped-coupon problems, however it is tough to conclude whether there is any direct connection in between the 2. There is an argument that sovereign, supranational, and company (SSA) companies are the very best prospects to lead in SOFR bond maturity offerings. The World Bank and other companies have actually introduced billions of seven-year SOFR bonds in the previous couple of months, which ought to get the ball rolling.

International View: SONIA Succeeding However TONAR Struggling

As all tenor settings of GBP and JPY LIBOR have actually stopped since December 31, 2021, the Sterling Overnight Index Average (SONIA) and Tokyo Overnight Average Rate (TONAR) bond markets can work as excellent signs of the future of the SOFR bond market.

The UK bond market is smaller sized than the U.S. market. The UK business problem quantity has to do with 8% of its U.S. equivalent, while the SSA problem quantities are even less than 8%. The UK SSA companies are not passionate about FRN issuance, not to mention SONIA issuance. Business SONIA issuance seems more natural:

  • The SONIA problem quantity in 2021 is comparable in scale to the LIBOR problem quantity in 2019, suggesting an efficient shift
  • Each maturity term takes an equivalent share in the SONIA issuance, recommending a deep maturity tenor offering
  • SONIA seems highly promoted as a benchmark rate with very little Term SONIA issuance and no other alternative rates in factor to consider

The Japanese bond market is more relatable to the U.S. market in regards to problem quantities. There are a number of referral rates in Japan that have actually been acquiring appeal considering that the shift far from LIBOR, consisting of the Tokyo Interbank Offered Rate (TIBOR), Tokyo Term Threat Free Rate (TORF), and treasury rates. As in the UK, SSA companies in Japan are not thinking about FRN issuance. When it comes to business issuance, we have actually observed the following patterns:

  • The shift is taking place really gradually. Around 18% of FRN released in 2021 referenced LIBOR. According to the advised alternative waterfall from the Bank of Japan, the very first level will transform LIBOR to TORF.
  • There appears to be no inspiration to provide TONAR financial obligation. There is a $1 billion bond issuance on TONAR in 2019, followed by absolutely no in 2020. In 2021, there was a one-time TONAR bond issuance by Mitsubishi Corporation of $130 billion, totaling up to about 3% of FRN issuance.
  • TIBOR keeps its appeal while treasury rates are on the increase. The TIBOR issuance has actually been stable at around 5% of FRN issuance each year. Nevertheless, the treasury connected issuance represented around 6% of FRN issuance in 2020 and quickly increased to 53% in 2021. In January 2022 alone, the treasury-linked problem quantity was $95 billion compared to absolutely no TONAR problems.

The U.S. bond market appears to fall in between the UK and Japan markets. The U.S. market is detecting SOFR issuance, however doing not have maturity depth as seen in the UK market. There are a number of alternative rates acquiring appeal, however absolutely nothing comes out as strong as TIBOR or treasury rates in the Japan market.


As Rome wasn’t integrated in a day, a number of turning points have actually been struck in the advancement of the SOFR bond market, however this may be the start of the journey. As much as we would like to see a much deeper SOFR bond market, the advancement may not follow the course of LIBOR. With Term SOFR and the other alternative rates actively being utilized, the future of the FRN bond market might be more varied yet more made complex in numerous methods.

This article is for informative functions just. The info consisted of in this article is illegal, tax, or financial investment guidance. FactSet does not back or advise any financial investments and presumes no liability for any repercussion relating straight or indirectly to any action or inactiveness taken based upon the info consisted of in this short article.

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