Instruments Used to Build the Front End of a SOFR Curve

Summary

The document describes one practitioner’s approach to constructing the very front end of a SOFR discount curve. The suggested inputs are short-dated fixed-for-floating SOFR swaps, swaps dated to upcoming Federal Open Market Committee meetings, and on-the-run SOFR futures in the white and red contract periods. Together, these instruments provide market rates across near-term dates where the curve has considerable structure.

The response does not establish a universal market convention. It offers no comparison of fixings versus futures, no analysis of their advantages or drawbacks, and no guidance on how far out to use futures. It is a concise account of an individual’s practice rather than evidence from a broader survey or a tested construction method. The reader should therefore treat the instrument list as a practical example, not a settled standard for every market participant or curve-building purpose.

Key ideas

• Short-dated SOFR swaps can provide rates for the curve’s nearest maturities.
• FOMC-dated swaps can represent expected rates around upcoming policy meetings.
• On-the-run SOFR futures in the white and red periods are another input for the very front end.
• The response presents a practitioner’s method and says a firm market convention may not yet exist.

Tags

# Market convention for building the front-end of the SOFR discounting curve


# Market convention for building the front-end of the SOFR discounting curve












In SOFR Discount Curve Construction in Nov 2021, @dm63 does an excellent job describing the way to build the SOFR discount curve. A few questions:

- What is the market convention for building the front-end of the curve?

- Do folks use the SOFR fixings or SOFR futures more commonly?

- What are the pros and cons of each method in question 2?

- When using SOFR futures to build the curve, is it common to use SOFR futures expiries past 2 years (i.e. similar to when folks would use a strip of 4 or 5 years of Eurodollar futures to build the LIBOR discount curve, then use swaps beyond that point)?

Thanks!

## Answer by river_rat (score 6)

https://quant.stackexchange.com/a/69504

The front end of the SOFR curve has a lot of structure in it. I cant talk to "market convention" as I doubt something like that exists yet but I use

- Fixed for floating SOFR swaps (1w, 2w, 3w, 1m, 2m, 3m etc)

- FOMC dated fixed for floating swaps (next 4 FOMC dates)

- On the run (so not yet fixing) SOFR futures in the white and red period

to build the very front end of my SOFR curve.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.