# Bond quotes to EDSF

I am having a hard time understanding what "EDSF" (Eurodollar Synthetic Forward Curve) represents as a bond pricing benchmark. I have seen bonds quoted as spreads to EDSF with maturities < 2 years instead of treasury notes, and this seems to be a common convention in the ABS market.

Here is a footnote from a recent Wells Fargo consumer ABS report

EDSF used to price fixed-rate bonds with WAL < 2.0 years, swaps >= 2.0 years. Discount margin (DM) to price floating-rate bonds. Source: Wells Fargo Securities

Bloomberg has an EDSF function, but this just calculates implied forward rates given ED futures prices. What is the "EDSF" benchmark rate used for spreads? I assume it is some sort of I-spread but I am confused by the "forward" aspect as pricing is generally just against a spot yield. And do you have to apply a convexity adjustment (assuming no since that is model dependent)?

If someone can help me with the math here that would be helpful- I am trying to calculate the EDSF rate (or build a curve) so that bonds can be priced off of it.

• I don't work with ABS. But my guess is that a fixed rate for the time horizon corresponding to the WAL is calculated from the ED forward curve, and this fixed rate is the base for calculating the I-spread. (Perhaps the Bloomberg EDSF command does this calculation for you, I cannot check that however). But if WAL>= 2 years the fixed rate for a swap of that tenor is used instead. Commented Apr 24, 2020 at 16:39

The EDSF rate is the rate derived from the Eurodollar Synthetic Forward Curve.

Type EDS on your Bloomberg terminal. Most of the time, unless the markets are very anomalous, you see two strikingly different USD curves up to 2 years. The swap rates implied by the ED futures look much "prettier" than the swap rates actually observed in the market (S23 30/360 v 3M libor). The latter have weird kinks in the first 2 years. Later, between 2 and 10 years, the curves are not that different.

You'd still use S23 to price an actual 2-year IR swap (e.g. in SWPM); but in other contexts, for example projecting floater coupons from libor rates implied by the curve, or calculating Z-spread or discount margin of a bond maturing in less than 2 years, many people look at this graph and choose to use the futures-based curve rather than the actual observed swap rates.

• Thanks, that makes sense. But doesn't Bloomberg use ED futures for the short end of their USD swaps curve, as swaps wouldn't be trading that short? How would the EDSF rate be different if both curves are built with ED futures < 2yrs? Or is the difference just due to the convexity adjustment, which would be used when building the short end of S23 but I'm guessing not for quoting bonds as that is model-dependent? (I don't have access to Bloomberg right now). Commented Apr 24, 2020 at 19:42
• I don't have Bloomberg this minute, but I recall it's a setting in SWDF<go> the default configuation is to use OTC instruments for the entire swap curve, but you can change it to use EDFs, which are much more liquid, for the short end. Commented Apr 24, 2020 at 20:27