Trading in SOFR derivatives, which lenders use to manage their risks, has significantly picked up in volume in August. This signals increasing buy-in from investors, and paves the way for stable, forward-looking longer-term rates for SOFR loans. Investors are well on their way to incorporating SOFR into the ecosystem.
That price, or spread, gap may present some challenges in the near term. Complex financial products like CLOs, which are backed by pools of loans, may also face some risk from this disparity.
If its underlying loans use a different interest rate than the interest rate CLOs use to sell ownership stakes to outside investors, the difference may reduce returns. To that end, the Federal Reserve backed-AARC has already recommended a set method that accounts for the spread difference between the two rates. This is an issue that will probably resolve over time.
A research report from Bank of America Corp. This could also temporarily pause new loan and CLO issuance in early This comes as CLOs, which account for most of the loan market, are projected to see a record-setting year of sales.
CLOs might be a bellwether for how well the transition is going because it has such an outsized impact on investor demand. Regulators and legislators are reviewing several solutions, including federal legislation that would smooth disruption risk. Changing the way loans are priced is a big undertaking for the market, and naturally there might be some snags to work out along the way.
In the end, the market has strong incentive to work those snags out, price securities effectively, and transition successfully out of LIBOR. Collateralized Loan Obligations : Securities backed by a pool of assets, often low-rated corporate loans.
Values of debt securities may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities. Loans can carry significant credit and call risk, can be difficult to value, and have longer settlement times than other investments, which can make loans relatively illiquid at times.
High Yield-High Risk Fixed Income Securities: There is a greater level of credit risk and price volatility involved with high yield securities than investment grade securities. We use cookies to make our services work and collect analytics information. To accept or reject analytics cookies, turn on JavaScript in your browser settings and reload this page.
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