Following a jump in the U.S. Treasury yields, the Secured Overnight Financing Rate (SOFR) swap spreads have widened, signaling a “serious liquidity” issue, according to Ark Invest’s Cathie Wood. Experts believe that only the government and the Federal Reserve’s intervention would be able to contain this crisis.
What Happened: SOFR is a benchmark interest rate that reflects the cost of borrowing cash overnight, and it is used as a reference rate for various financial transactions.
On the other hand, the SOFR swap spread is the difference between the fixed rate in a SOFR-based interest rate swap and the yield on a government bond of the same maturity.
This surge in SOFR swap spread is a result of the dramatic rise in the 10-year Treasury bond yields, which are up from a recent low of 3.87% on April 4, which was two days after the “Liberation Day,” to 4.44% at the time of writing.
According to Wood, a widening negative SOFR swap spread is sending a distress signal pointing to a potential crisis of liquidity in U.S. banks.
She argues that this crisis necessitates a geopolitical solution through a trade agreement, which she terms the “Mar-a-Lago Accord,” and a monetary policy solution through aggressive intervention by the Federal Reserve.
She further underscores the severity of the situation by adding that there is “No more time to waste”.