Recently I have been going through a lot of documents for SOFR (Secured Overnight Financing Rate) as there is a SOFR implementation in my organization. I am not able to understand how SOFR term structure will be build. SOFR is published only for 1 day and there are only 20 SOFR futures traded.

How will be the forecasting of cash flows after 5 years happen? What underlyings will be used to do bootstrapping for generating a SOFR EOD term structure?


At this point liquidity in SOFR is provided by a set of futures contracts in the very short end of the curve , and then through Libor -SOFR basis swaps which are reasonably liquid up to around 5years, although quotations exist up to 30yrs. You can build a curve using these basis swaps. Currently , the SOFR curve differs from the Fed Funds curve by only a few Bp, which isn’t too surprising given that the overnight setting of SOFR is usually very close to overnight Fed Funds.

Most participants think that liquidity will build over time so that SOFR will be quite liquid by year end 2020. Eventually it is expected that the standard swap quote will be against SOFR rather than Libor , but that may be 2-3 years down the road.

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    $\begingroup$ "Eventually it is expected that the standard swap quote will be against SOFR rather than Libor" well LIBOR is going to be retired so there won't be much choice. For example in the UK, the BoE and the FCA have set up March 2 (so barely 1.5 month!) as a deadline for swaps to start quoting reformed SONIA and drop LIBOR altogether. $\endgroup$ Jan 30 '20 at 11:33
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    $\begingroup$ @daneel olivaw, yes, the UK is ahead of the US in the transition, because they chose Sonia , an existing rate, rather than SOFR, which had to be created. The US will catch up. $\endgroup$
    – dm63
    Jan 30 '20 at 11:44

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