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There's a structured investment I've seen based on interest rates with this formula for it's floating portion:

6*(USD SOFR CMS30Y - USD SOFR CMS5Y).

Based on my rudimentary understanding, SOFR is a new rate that replaced LIBOR. I know it stands for Secured Overnight Financing Rate, but I have no idea what it actually means.

CMS stands for Constant Maturity Swaps, and it's a kind of interest swap, but again I don't really understand what it is.

This formula says that the investment product will pay interest if the formula produces a positive number. If it's 0 or below 0, there will be 0 interest.

Where do I find the actual CMS30Y and CMS5Y rates? Because I can't find it online (or perhaps it is called something else, I'm not very familiar with these things as you can see). It would also help to explain what SOFR and CMS are.

RonJohn
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ronald christenkkson
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1 Answers1

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SOFR itself is a Secured Overnight Financing Rate (a rate for one night, resetting daily, that is secured).

For the product, you look at SOFR overnight index swap (OIS) rates. RFR (risk free rate) is the current acronym ISDA, central banks and regulators use for the indices in IBOR transition. SOFR is such a rate. In the US, OIS can be Fed Funds (FF) or SOFR. So a SOFR swap is a fixed float interest rate swap where the float leg is based on the daily SOFR rate.

CMS is a constant maturity swap rate (meaning the maturity stays the same), and is based on the SOFR swap tenors.

The product is essentially a position (bet) on the difference between long term rates and short term rates in SOFR swaps.

With regards to prices, ICAP, Bloomberg, Reuters and ICE should have quotes. I am not sure about free sources. These aren't very liquid.

If I have time I may check on Bloomberg but the rates from Chatham will definitely be close. For pricing you would need a computed forward which is tricky but to get a historical look at the rates you can use these. It's an inverted yield curve at the moment which just means your product will pay 0 (as you wrote). The formula will be 6*max(30yr-5yr,0) though, based on your explanation of the product.

I would read it carefully though, because frequently these products come with not only a floor but also a cap (a combination of max and min in the formula).

AKdemy
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  • So on this page: https://www.chathamfinancial.com/technology/us-market-rates is the SOFR swap rate (annual/annual) 5-year and 30-year information pertinent to my question? But then the 5-year rate is greater than the 30-year rate by a large margin, so maybe this isn't what I'm looking for. Thanks. – ronald christenkkson Apr 20 '23 at 15:46