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 LP. The BSBY provides a series of credit-sensitive reference rates that incorporate bank credit spreads and it defines a forward term structure. BSBY also seeks to measure the average yields at which large global banks access short-term senior unsecured wholesale funding.

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).

Key Takeaways

  • The Bloomberg Short-Term Bank Yield Index (BSBY) provides a series of short-term rate benchmarks for banks to use when lending to one another.
  • It was launched in 2021 and is published by Bloomberg LP.
  • The BSBY uses transaction data in short-term credit markets such as commercial paper, CDs, demand deposits, and corporate bonds.
  • Transaction data is aggregated from Bloomberg's own proprietary trading platforms as well as data published by FINRA.
  • The BSBY is intended to supplement the SOFR rate, in an effort to facilitate the move away from LIBOR.

Understanding the Bloomberg Short-Term Bank Yield Index (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 a benchmark known as the London Interbank Offered Rate, more commonly known as LIBOR. However, following a series of criticisms and scandals involving LIBOR, regulators decided to phase out its use.

In its place, several candidates have emerged, led by the Secured Overnight Funding Right, or SOFR, which is based on transactions in the collateralized Treasury repurchase (repo) market.

The Bloomberg Short-Term Bank Yield Index was created by the financial data and analytics firm Bloomberg LP as an alternative replacement to LIBOR, and was launched in 2021. Instead of relying on the Treasurys repo market, the Bloomberg Short-Term Bank Yield Index looks at rates material to banks' marginal funding costs, including those of commercial paper (CP), certificates of deposits (CDs), 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 FX and money-market electronic trading products and trades of senior unsecured bank corporate bonds reported by FINRA.

The BSBY consists of overnight, 1-month, 3-month, 6-month and 12-month yields, published daily at 7 am Eastern Time.

On Nov. 30, 2020, the Federal Reserve announced that LIBOR would be phased out and eventually replaced by June 2023. In the same announcement, banks were instructed to stop writing contracts using LIBOR by the end of 2021 and that all contracts using LIBOR should wrap up by June 30, 2023.

BSBY Index Methodology

The BSBY uses an advanced curve-fitting methodology to calculate its benchmark yields. The yields of the resulting dataset 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 (versus $75 million for transactions). To ensure that transaction data gets assigned its correct weight over executable data, a 12.5% coefficient adjustment is made to executables.

From the resulting weighted data, overnight, 1-month, 3-month, 6-month, and 12-month BSBY yields are generated through a localized trimmed linear curve fitting process to minimize the influence of outliers.

BSBY Components by Term
BSBY Components by Term.

Bloomberg Short Term Bank Yield Index (BSBY) vs. Secured Overnight Financing Rate (SOFR)

With the demise of LIBOR, the SOFR has become a dominant contender to replace it as the overnight interbank benchmark rate. As mentioned, 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. But because SOFR is based on secured repo transactions, using it as a benchmark for loans potentially can create a significant mismatch between a given bank’s assets (loans) and its liabilities (borrowings).

Bloomberg asserts that the BSBY can be used successfully as a supplement to SOFR for banks to get a more complete picture of their financing costs.

Like 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 SOFR (as the 'S" in the acronym implies). Because SOFR looks at the Treasurys market, it is also best-suited for larger financial institutions. The BSBY instead reflects the actual borrowing costs of thousands of small, medium, and regional banks across America.

When Did the Bloomberg Short-Term Bank Yield Index (BSBY) Launch?

The BSBY debuted in 2021 and is published by Bloomberg LP. Bloomberg initially began publishing the BSBY on an indicative basis for the purposes of illustration and analysis on Oct. 15, 2020.  

Where Can I Find the BSBY Published Yields?

The BSBY rates can be found on the Bloomberg Terminal.  The terminal commands are: overnight {BSBYON <GO>}, 1-month {BSBY1M <GO>}, 3-months {BSBY3M <GO>}, 6-months {BSBY6M <GO>} and 12-months {BSBY12M <GO>}.

Why Is LIBOR Being Phased Out?

While LIBOR was once arguably the most important short-term benchmark interest rate, it has been found to have been subject to rampant manipulation, scandal, and methodological critique, making it less credible today as a valid benchmark. The rate is being phased out so that by the end of 2021, no new contracts could be written using LIBOR; by mid-2023, all existing LIBOR-based products will be terminated. LIBOR has been replaced by the Secured Overnight Financing Rate (SOFR), although several other alternatives, such as the BSBY and Ameribor, also exist.

Article Sources
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  1. Federal Reserve Board. "Goodbye to All That: The End of LIBOR."

  2. Bloomberg. "Bloomberg Short-Term Bank Yield Index."

  3. Bloomberg. "Bloomberg Launches Short Term Credit Sensitive Index to Support IBOR Transition."

  4. Bloomberg. "BSBY White Paper," Pages 6-7. (Registration required for download.)