Inferring Term Rates from Sofr Futures Prices

25 Pages Posted: 14 Mar 2019

See all articles by Erik Heitfield

Erik Heitfield

Federal Reserve Board - Division of Research and Statistics

Yang-Ho Park

Board of Governors of the Federal Reserve System

Date Written: 2019-03-05

Abstract

The Alternative Reference Rate Committee, a group of private-sector market participants convened by the Federal Reserve, has recommended that markets transition to the use of the Secured Overnight Financing Rate (SOFR) in financial contracts that currently reference US dollar LIBOR. This paper examines the feasibility of using SOFR futures prices to construct forward-looking term reference rates that are conceptually similar to the term LIBOR rates commonly used in loan contracts. We show that futures-implied term SOFR rates have closely tracked federal funds OIS rates over the eight months since SOFR futures began trading. To examine the performance of our approach over a longer time horizon, we compare term rates derived from federal funds futures with observed overnight rates and OIS rates from 2000 to the present. Consistent with prior research, we find that futures-implied term rates accurately predict realized compounded overnight rates during most periods.

Keywords: Interest rates, Futures, Reference rates, Financial contracts, LIBOR, SOFR

JEL Classification: G12, G18

Suggested Citation

Heitfield, Erik and Park, Yang-Ho, Inferring Term Rates from Sofr Futures Prices (2019-03-05). FEDS Working Paper No. 2019-014. Available at SSRN: https://ssrn.com/abstract=3352598 or http://dx.doi.org/10.17016/FEDS.2019.014

Erik Heitfield (Contact Author)

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2613 (Phone)

Yang-Ho Park

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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