SOFR Commentary January 2024

With the calendar now turned to 2024 and the first Federal Reserve meeting behind us, it is an exciting time for short duration fixed income products such as the Amplify Samsung SOFR ETF (SOFR).  The Secured Overnight Funding Rate (SOFR) has recently traded above 5.3%, the highest level in the six-year history of the index.  The treasury curve remains inverted, which means short duration products like SOF may currently offer a higher yield than many similar long duration products. Meanwhile, the overnight funding market has an interesting mix of catalysts coming up that investors should be aware of.  

The United States fiscal deficit is high and is likely to remain that way. The US Treasury calculates the 2023 deficit as $1.7 Trillion and most third-party estimates are for similar size deficits in 2024, since the prospect of either tax increases or spending cuts in an election year appear slim.  Large deficits lead to a high amount of Treasury bill issuance to finance government obligations, creating a large amount of potential collateral for the REPO market.  Recent treasury auctions have shown that investors want to be compensated to fund increasingly large government debt, which keeps some upward pressure on rates. 

The market expects the Federal Reserve may soon cut the federal funds rate for the first time in nearly four years, but Fed President Powell and other FOMC members have recently hinted that the Federal Reserve is not likely to cut rates as aggressively as the bond market has been reflecting.  Based on the probability implied from interest rate futures, investors currently project a 40% chance that a rate cut is announced in the March 20th meeting (at the end of 2023, the probability of a March cut was more than 80%).  Powell’s motivation is clear, as the Fed doesn’t want to cut rates too aggressively and risk inflation re-accelerating the same way it did in the late 1970s.

We believe the longer the Federal Reserve leaves short term interest rates at current levels, the more opportunity there is to earn interest at rates that are not presently available anywhere else in high quality US government debt.

Related ETF

• SOFR: Amplify Samsung SOFR ETF

There can be no assurance that the Fund’s investment objectives will be achieved. The Fund is new with limited history to evaluate. There is no assurance that SOFR, or rates derived from SOFR, will perform in the same or similar way as other more established rates would have performed at any time. The Fund’s use of financial instruments involving counterparties, including swap arrangements, involves risks that are different from those associated with ordinary portfolio securities transactions. The Fund expects to invest principally in repos (Repurchase Agreements). If the seller fails to repurchase the security and the market value of the security declines, the Fund may lose money.

There is risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. The Fund may hold certain investments that may trade over-the-counter, trade in limited volume, or lack an active trading market. The Fund is subject to management risk because it is an actively managed portfolio. The Fund currently has fewer assets than larger funds, and like other new funds, large inflows and outflows may impact the Fund’s market exposure for limited periods of time. Because the Fund is non-diversified, it can invest a greater portion of its assets in securities of individual issuers so that changes in the market value could cause greater fluctuations in Share price than would occur in a diversified fund.