Libor's Heir Presumptive Prepared to Take on Bank Bond Market

The heir presumptive to dollar LIBOR is gaining traction with debt issuers, and banks may be ready to sell floating-rate notes linked to it within months.

That’s the view of Toronto-Dominion Bank, which was involved with managing the first two bonds ever tied to the new secured overnight financing rate (SOFR). Those note sales, which both took place within the past month, raised $6 billion for the government-sponsored enterprise Fannie Mae and $1 billion for the World Bank.

“It’s months, not years, before we see a financial or a corporate,” said Greg Moore, head of fixed income, currencies, and commodities for the U.S. at TD Securities. “I’m currently spending probably about 50 to 60 percent of my time on SOFR and the vast majority of that is traveling, seeing clients, and talking them through the nuances and the difference of the SOFR market versus markets they may be more familiar with.”

SOFR was developed by the Federal Reserve Bank of New York as a dollar-market alternative to the beleaguered London interbank offered rate, which has been marred in recent years by rigging scandals and lackluster volumes. The new gauge, which was introduced in April, had some issues with settings shortly after its debut, but the market has since seen the introduction of futures linked to it, as well as the two debt transactions in recent weeks.

The new benchmark is calculated based on overnight loans collateralized by U.S. government debt. LIBOR, on the other hand, is derived from a daily survey of large banks that estimate how much it would cost to borrow from one another without putting up collateral.

SOFR was set at 1.93 percent for Tuesday, up 2 basis points from the previous day. Overnight dollar LIBOR for the same day was 1.91325 percent.

Investors are familiar with floaters based on the fed funds rate, which is a very similar product to the SOFR-linked securities, so that’s helping people to adjust to the new benchmark, according to Moore.

The World Bank transaction was bought by 27 separate purchasers who placed orders totaling around $1.4 billion, according to a statement from the issuer. Buyers hailed from the Americas, Asia, and Europe, although around three-quarters of the deal went to U.S. investors. Central banks and official institutions accounted for almost 56 percent of the offering.

The World Bank and Fannie Mae are among the most sophisticated issuers and typically pave the way for others in debt markets, according to TD’s Moore. They moved “incredibly quickly” in getting the SOFR-linked issuance ready, he said, adding most other institutions would not move as rapidly.

“There’s work to be done in terms of systems and booking and other challenges any firm would have, and corporate clients may take a little bit longer to get that done versus somebody like the World Bank.”

From: Bloomberg

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