The Treasury — SOFR Swap Spread Puzzle Explained
Year: 2025
Type: article
Abstract: SOFR swap rates have been consistently lower than US Treasury rates since their publication in October 2018. This difference is puzzling because it represents a potential arbitrage opportunity that is easily replicated in repo and bond markets. Furthermore, a traditional explanation for LIBOR-swap spreads, credit risk, no longer applies because SOFR is a near riskless rate. This paper examines market frictions and regulations in swap, bond, and repo markets to show that these swap spreads can be explained by three factors: bond market price quotes, repo transaction costs, and funding costs due to Basel III regulations.
Source: Quarterly Journal of Finance
Authors: David Wu, Robert Jarrow
Institution: Cornell University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7120225164