SOFR curve

MacroVar analyses the SOFR forward curve to monitor the market’s expectations for the Federal reserve’s future monetary policy actions (rate hikes/cuts) depending on the current dynamics of financial markets and macroeconomic indicators.

Currently the SOFR forward curve shows a peak of interest rates in the first quarter of 2024, and a steady reduction in FED rates.

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MacroVar presents the current shape of the SOFR curve compared to the SOFR curve in previous periods (1 week ago, 1month, 3 months, 6 months and 1 year). The shape of the SOFR curve which is assembled from SOFR futures provides estimates of the assumed path for the specific reference periods.

What is the SOFR curve

The SOFR (Secured Overnight Financing Rate) forward curve is a representation of expected future SOFR rates at various points in time. SOFR is a benchmark interest rate that serves as a replacement for the traditional LIBOR (London Interbank Offered Rate) in the United States. It is based on actual transactions in the overnight U.S. Treasury repurchase agreement (repo) market and is considered a more robust and reliable reference rate.

The SOFR forward curve is used by financial institutions, investors, and market participants to estimate and project future borrowing and lending costs, as well as to value various financial instruments and derivatives. It is important for risk management, interest rate hedging, and pricing various financial products.

SOFR forward curves can be constructed using a combination of historical SOFR rates and market-based expectations for future SOFR rates. These curves are typically derived from various sources, including trading in SOFR-linked derivatives, such as futures and swaps, as well as market surveys and expert judgment.

The construction of SOFR forward curves is essential for the transition away from LIBOR, as it provides a reference point for pricing and valuing financial products tied to SOFR. The curves typically cover various tenors (e.g., 1-month, 3-month, 6-month), allowing market participants to have a view of the future interest rate landscape based on SOFR.

It’s worth noting that the development and usage of SOFR forward curves may evolve over time as the financial industry continues to adapt to the post-LIBOR environment, and regulatory guidance may also play a role in shaping how these curves are determined and used.