JPMorgan Econ FI-Interest Rate Derivatives Term Funding Premium and the Term ...-107900680

SriniRamaswamyAC(1-415)315-8117PhilipMichaelides(1-212)834-2096NorthAmericaFixedIncomeJPMORGANsrini.ramaswamy@jpmorgan.comphilip.michaelides@jpmchase.comStrategyJ.P.MorganSecuritiesLLCJ.P.MorganSecuritiesLLC29April2024IpekOzil(1-212)834-2305ArjunParikh(1-212)834-4436ipek.ozil@jpmorgan.comarjun.parikh@jpmchase.comJ.P.MorganSecuritiesLLCJ.P.MorganSecuritiesLLCInterestRateDerivativesTermFundingPremiumandtheTermStructureofSOFRSwapSpreads•Inapost-LiborworldwithSOFRasthefloatingratebenchmark,swapspreadsare-toaconsiderableextent-areflectionofakindoftermpremium.Thisisbecausetheswapratereflectstheannualizedreturnthatcanbelockedintodayfromastrategyofrollingovernightrisk-freeloansoversomehorizon(say,10years),whilethecorrespondingTreasuryyieldreflectsthereturnonatermrisk-freeloantothatsamehorizon.Theswapspread,beingthedifferencebetweenthetwo,isareflectionofthepremiumassociatedwithcommittingfundingtoterm•TermFundingPremiumisdirectlyvisibleinthecaseofTreasuryFRNs,whicharefloat-ingratenotesthatarelinkedto3MTbillsbuttypicallypriceandtradeatapositivespreadoverthatbenchmark.Thispositivespreadistheinvestor’scompensationforlendingfora2Yperiod,ratherthanrolling3MTbills-TermFundingPremium,inotherwords.InthemuchbroadernominalTreasurymarket,TermFundingPremiumislessdirectlyvisi-ble,butneverthelessobservablethroughswapspreads•Ofco...