The soft forward curve reflects market expectations of future Secured Overnight Financing Rate (SOFR) rates based on current and anticipated market activity. It serves as a powerful analytical tool for financial transactions and risk management strategies in the post-LIBOR era.

A sofr forward curve is built using market data from SOFR futures contracts that are traded on exchanges. It is critical to source the most accurate and credible data points to ensure the quality of your sofr curve. A good sofr forward curve should be constructed with a process called bootstrapping, which relies on observed prices of SOFR futures contracts that span the time horizon of interest.

Navigating the SOFR Forward Curve: What You Need to Know

Market liquidity is another important factor that influences the sofr forward curve. Adequate liquidity allows market participants to express their interest rate expectations effectively, contributing to a more accurate sofr curve.

Unexpected geopolitical events, like trade wars and political tensions, may introduce uncertainty into the market and affect market expectations. This can cause a wide range of effects on the sofr forward curve, including changes in market volatility and interest rate expectations.

Lastly, key dates can play a significant role in SOFR forward curve dynamics. Historically, LIBOR-linked benchmark rates have jumped when the Federal Reserve changes its policy rates. Similarly, SOFR and EFFR have been known to spike on certain dates such as end of month and end of quarter closings. This can cause a wide range of disruptions in the marketplace and impact SOFR’s credibility as a replacement for LIBOR.