Create Low-Cost Synthetic Term Funding As the Fed Prepares For Its First Rate Hike

As markets gets ready for the FOMC to begin the tightening cycle, banks are considering various options on the funding side of their balance sheet.  For banks looking to fund beyond their organic deposit-gathering capacity, there are a variety of funding sources available, and each one has its own benefits and risks.

We present an idea that allows banks to create term funding at considerably lower rates compared to other traditional fixed rate wholesale funding alternatives available.  We also present a market anomaly in 1s3s basis that allows a bank to reduce their cost of funds on existing 3 month LIBOR swaps by switching them to swaps tied to 1 month LIBOR.

As markets gets ready for the FOMC to begin the tightening cycle, banks are considering various options on the funding side of their balance sheet.  For banks looking to fund beyond their organic deposit-gathering capacity, there are a variety of funding sources available, and each one has its own benefits and risks.

We present an idea that allows banks to create term funding at considerably lower rates compared to other traditional fixed rate wholesale funding alternatives available.  We also present a market anomaly in 1s3s basis that allows a bank to reduce their cost of funds on existing 3 month LIBOR swaps by switching them to swaps tied to 1 month LIBOR.

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