April Rates Recap

• SOFR futures ADV topped 62K contracts/day for the second month in a row with record bank and buy-side participation. Open interest hit 612K contracts.
• Cleared SOFR swaps volume surpassed $59B while open interest grew to $84B (view chart).
• SOFR options saw multiple days of trading volume even while participants had pressing risk management needs during the month.
• SOFR debt issuance surged to a monthly record $150B* notional, nearly tripling the previous monthly high (view tenor chart).
• CME Group published a new presentation outlining details for the SOFR and ESTR Discounting Transition.

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Drawing on extensive activity in inter-commodity spreads (ICS) vs. Eurodollars and Fed Funds, SOFR futures again proved to be an additive tool for managing exposure to short-term funding markets.

In March, with ICE Libor-OIS and SOFR-EFFR spreads widening to multi-year highs, daily volume in SOFR-based ICS jumped to over 34K contracts per day, representing over $1.35M in DV01 risk transfer per day. (view ICS chart)

SR3-ED spreads, a liquid proxy for trading the ICE Libor-SOFR spread, jumped to 58.5 bps

Source: STIR Analytics tool

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While credit risk exposure has traditionally been captured by spreading swaps vs. cash Treasuries, the rise of Invoice Swap Spreads in recent years gives clients a more efficient alternative for trading swap spreads.

• Invoice Spreads are packaged trades which typically involve buying (selling) UST futures and paying (receiving) fixed on a related interest rate swap with a similar risk profile. This can either be a vanilla fix/float swap or a SOFR OIS.
• This spread represents the difference between forward yields on UST futures, and the fixed rate on comparable interest rate swaps.
• Provides off-balance sheet exposure and precise alignment of dates between futures and swaps.

Trading volume has grown to 165K contracts ($23B notional) per day YTD, +45% vs. 2019 and +246% vs. 5 years ago.

Trading Invoice Spreads:

• Invoice Spreads are privately negotiated, with the UST futures leg submitted to CME Clearing as an EFR (exchange-for-risk) transaction under Rule 538, and the swap leg processed independently.
• Modifications to Rule 538 in 2016 enabled packages of multiple invoice spreads to be traded in the same manner (i.e. calendar spreads and tenor switches).
• Clearing both legs at CME can generate margin savings as high as 81% via portfolio margining – a service that delivered a record $7B in client savings in March.
  • SOFR OIS vs. UST futures are also eligible for portfolio margining
• View indicative savings for Invoice Spreads >

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