Bloomberg Short-Term Bank Yield Index (BSBY)

What Is the Bloomberg Short-Term Bank Yield Index (BSBY)?

The Bloomberg Short-Term Bank Yield Index (BSBY) is a series of short-term interest rate benchmarks created in 2021 and published by Bloomberg L.P. The BSBY provides a series of credit-sensitive reference rates that incorporate bank credit spreads, and it defines a forward term structure. The BSBY also seeks to measure the average yields at which large global banks access short-term senior unsecured wholesale funding.

The BSBY was created in response to the global shift away from the London Interbank Offered Rate (LIBOR) and is meant to supplement its assumed replacement, the Secured Overnight Financing Rate (SOFR).

Understanding the BSBY

When banks have extra cash reserves on hand, rather than have these funds sit idly, they can lend them to other banks that need reserves. This creates an interbank lending market with very short-term loans ranging from overnight to several weeks. In the past, the interest rates charged on such loans were referenced to the LIBOR benchmark. However, following a series of criticisms and scandals involving the LIBOR, regulators decided to phase out its use.

In its place, several candidates have emerged, led by the SOFR, which is based on transactions in the collateralized U.S. Treasury repurchase (repo) market.

The BSBY was created by the financial data and analytics firm Bloomberg L.P. as an alternative replacement to the LIBOR, and it was launched in 2021. Instead of relying on the Treasurys repo market, the BSBY looks at rates material to banks’ marginal funding costs, including those of commercial paper (CP), certificates of deposit (CDs), U.S. dollar (USD) bank demand deposits, and short-term corporate bonds. These rates are aggregated from consolidated, anonymized transaction-related and firm executable quotes, including pricing observations sourced from Bloomberg’s proprietary forex (FX) and money market electronic trading products and trades of senior unsecured bank corporate bonds reported by the Financial Industry Regulatory Authority (FINRA).

The BSBY consists of overnight, one-month, three-month, six-month, and 12-month yields, published daily at 7 a.m. Eastern time.

BSBY Index Methodology

The BSBY uses an advanced curve-fitting methodology to calculate its benchmark yields. The yields of the resulting data set are normalized across instrument types (using an actual/360 day-count convention). Each transaction is then weighted by its trade size, while each executable data point is weighted by an eighth (12.5%) of its quoted size. Bloomberg states that this is because, historically, the average executable trade size is $200 million (vs. $75 million for transactions). To ensure that transaction data gets assigned its correct weight over executable data, a 12.5% co-efficient adjustment is made to executables.

From the resulting weighted data, overnight, one-month, three-month, six-month, and 12-month BSBYs are generated through a localized trimmed linear curve-fitting process to minimize the influence of outliers.

BSBY vs. SOFR

With the demise of the LIBOR, the SOFR has become a dominant contender to replace it as the overnight interbank benchmark rate. As mentioned, the SOFR is computed from transactions in the Treasury repurchase (repo) market and is seen as preferable to LIBOR-like rates because it is based on data from observable transactions rather than on estimated borrowing rates set by bank trading desks. However, because the SOFR is based on secured repo transactions, using it as a benchmark for loans can potentially create a significant mismatch between a given bank’s assets (loans) and its liabilities (borrowings).

Like the SOFR, the BSBY is also based on actual transactions data; however, it relies on a range of unsecured loans rather than the secured (collateralized) repurchase agreements used in the SOFR (as the “S” in the acronym implies). Because the SOFR looks at the Treasurys market, it is also best suited for larger financial institutions. The BSBY, by comparison, reflects the actual borrowing costs of thousands of small, medium, and regional banks across the United States.