SOFR-Indexed Advance

Federal Home Loan Bank of Boston developed the SOFR-Indexed Advance to smooth the transition from LIBOR and offer another solution for members looking for ways to balance interest-rate and liquidity risks.

You may be asking, what is SOFR? 

SOFR, or the Secured Overnight Financing Rate, was created as an alternative reference rate to LIBOR. Unlike LIBOR, SOFR is derived from actual transactions in the trillion-dollar repo market, where transactions occur on an overnight term and are collateralized by U.S. Treasurys.

The SOFR-Indexed Advance is a variable-rate advance with a rate that adjusts daily at SOFR plus a fixed spread determined at initiation. 

This advance is useful in capturing the repricing benefits of a liability on the short end of the yield curve but allows the liquidity benefits of longer maturity advances. 

To put this in perspective, let’s look at an example:

Say you wanted to fund at the front end of the curve because you believe short-term interest rates will remain stable or fall. 

To accomplish this, you use the six-month SOFR-Indexed Advance priced at SOFR plus 25 basis points.

If the SOFR index on that day was .08%, your advance rate on day 1 would be .33%. Your rate would adjust based on the index (plus the spread) each day thereafter. 

You can see that this advance could be valuable when spreads on short-term funding become volatile. 

When you compare this to rolling one-month Classic Advances, the six-month SOFR-Indexed Advance will have less rollover or spread risk, while still having an all-in rate determined by the very front-end of the yield curve. 

Depending on market conditions, you may be able to save on interest expense by utilizing the SOFR-Indexed Advance instead of a Classic Advance.

Our strategies and solutions team can help you identify the funding solutions that best fit the unique needs of your balance sheet. 

Visit fhlbboston.com or call us at 1.800.357.3452.

Federal Home Loan Bank of Boston

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