“People have shied away from both fed funds floaters and SOFR-based floaters just because of what’s happening with the Fed in the repo market,” said Deborah Cunningham, chief investment officer of global money markets at Federated Investors in Pittsburgh. They “looked great with a nice wide spread and high levels until the Fed started doing all of their intervening.”

Cunningham said floating-rate debt -- including notes tied to Libor, fed funds, Treasury bills and SOFR -- account for about 25% of assets in prime money-market funds, and around 30% to 35% of assets in government-only funds.

Given the reduced demand from money funds, the drop-off is simply a reflection of a “normally functioning market” rather than the product of structural concerns over the new benchmark, according to David Wagner, a senior adviser at Houlihan Lokey Inc. who is leading the firm’s Libor Transition Advisory Services practice.

The FHLBs “know they can sell a SOFR floater, but if it’s more expensive to do it they’re going to cut down on issuance,” Wagner said. “This is good. With the Libor transition we’re used to policy-based decisions, but this is a market participant making an economic-based one.”

Declining FHLB issuance may also be due to concerns over exposure to SOFR-related products. Bank of America estimates the difference between the FHLBs’ SOFR-linked assets and liabilities -- also known as basis risk -- is at least $35 billion.

SOFR Treasuries?

Ultimately, the shift may be short-lived. The Federal Housing Finance Agency, which regulates the FHLBs, in September announced that all member banks by the end of the first quarter should stop selling Libor-linked debt maturing after December 2021. In addition, the agency is set to require mortgage giants Fannie Mae and Freddie Mac to stop purchasing Libor-based adjustable-rate mortgages by the end of this year.

And Wall Street strategist still see scope for the Treasury to potentially issue SOFR-linked notes in the near future, a move that would likely serve as a major catalyst for corporate participation in the market.

Both JPMorgan Chase & Co. and Barclays Plc expect the U.S. government to sell securities tied to the reference rate beginning in the second half of 2020 or 2021. At last week’s refunding announcement, the Treasury signaled plans to issue a request for information on the matter.

Yet for now, issuance of SOFR-linked debt remains tepid.