The SOFR Discount

Abstract

The transition from London Interbank Offered Rate (LIBOR) to Secured Overnight
Financing Rate (SOFR) affects the reference rate of floating-rate debt worth trillions
of dollars. Focusing on the primary market for dollar-denominated floating rate notes
(FRNs), we compare the issuance spreads of FRNs linked to LIBOR and SOFR, issued
by the same entity during the same month. After adjusting for the maturity-matched
spreads from derivatives markets, we find significantly lower spreads for SOFR-linked
FRNs. We link this SOFR discount to the enhanced price stability of SOFR-linked
FRNs. This is the first evidence highlighting a benefit of the benchmark transition for
debt markets.

Keywords: Benchmark rates, floating rates, financial regulation, Libor, SOFR

JEL Classification: E43, G12, G18, G29