The SOFR forward curve is the path of future SOFR rates implied by today’s prices of SOFR futures and SOFR overnight index swaps, one rate for each future month or quarter, and it is the right base case for budgeting floating-rate debt service because it is the rate path that swaps and caps are priced against today. It is not a forecast. Budget on the curve, then carry a higher path beside it, because the curve has missed turns in policy before.
Where the SOFR forward curve comes from
SOFR itself looks backward. The New York Fed publishes SOFR each business day at about 8:00 a.m. ET as a broad measure of the cost of borrowing cash overnight against Treasury collateral, drawn from tri-party, GCF and bilateral Treasury repo transactions. The 30-day Average SOFR used on many agency floaters is a compounded average of SOFR over the preceding 30 calendar days. See SOFR in the glossary.
The forward curve comes from two derivative markets that settle on SOFR.
SOFR futures. One-month contracts settle on the average of daily SOFR over the contract month; three-month contracts settle on compounded SOFR over the contract’s reference quarter. Each contract price therefore implies a rate for one future window.
SOFR overnight index swaps. An OIS exchanges a fixed rate for compounded SOFR over a period. According to the ARRC’s user’s guide, the fixed rate is set so the swap has zero value when it is traded, which makes it economically equivalent to the expected compounded average of SOFR over that term. SOFR swaps run far past the futures strip (ICE Benchmark Administration publishes USD SOFR swap rate benchmarks for tenors from 1 to 30 years), so the curve for longer loan terms comes from swaps.
Link the implied rates for consecutive windows and the result is the curve. One method, described by Federal Reserve staff in their 2019 work on term rates from SOFR futures, lets the expected path jump up or down on scheduled FOMC announcement dates and stay flat between meetings. A curve built that way looks like a staircase near the front.
CME Term SOFR is the same market condensed into a published rate. CME publishes 1-, 3-, 6- and 12-month Term SOFR at 5:00 a.m. CT on each day the New York Fed publishes SOFR, calculated from the prior day’s executed trades and executable bids and offers in thirteen consecutive one-month and five consecutive quarterly SOFR futures contracts (CME Group). The ARRC formally recommended CME’s term rates on July 29, 2021. A loan on 1-month Term SOFR is reset each month off the front of the futures strip that also shapes the forward curve.
Why the forward curve is not a forecast
Federal Reserve staff put it plainly in their 2019 paper: forward rates typically will not match the overnight rates later observed, both because they embed a modest risk premium and because new information arrives between the pricing date and the dates the rates are set. The ARRC’s guide draws the same line. A term rate reflects market expectations; a compounded average reflects what happened. The gap between the two has been material at times, particularly when rates fell quickly. In the Fed staff’s long-run comparison using federal funds futures, the largest misses came at the onset of the financial crisis, when futures prices failed to anticipate a sequence of policy rate cuts.
So why budget on it? Because it is a price. A borrower who swaps a floating loan to fixed pays a rate built from this curve. A cap dealer prices each period of a cap against it. The curve is the base case; the stress path is where the risk shows.
Budgeting debt service on the curve
Apply each period’s forward rate under the loan’s own terms: the index the documents name (Term SOFR set in advance, 30-day Average SOFR, or compounded SOFR in arrears), the floor, the spread, the daycount (usually actual/360) and, on amortizing floaters, the re-amortization at each reset. The mechanics are in floating-rate re-amortization and SOFR tracking.
Illustrative example: a $36 million interest-only floater at SOFR plus 2.60%, actual/360, on a downward-sloping forward curve (invented rates)
| Quarter (days) | Forward SOFR | All-in rate | Interest on the forward curve | Interest at forward plus 100 bp |
|---|---|---|---|---|
| Q1 (90) | 3.90% | 6.50% | $585,000 | $675,000 |
| Q2 (91) | 3.70% | 6.30% | $573,300 | $664,300 |
| Q3 (92) | 3.55% | 6.15% | $565,800 | $657,800 |
| Q4 (92) | 3.50% | 6.10% | $561,200 | $653,200 |
| Year (365) | $2,285,300 | $2,650,300 |
Each cell is balance times all-in rate times days over 360. Q1 on the curve: $36,000,000 x 6.50% x 90/360 = $585,000. The stress column adds $36,000,000 x 1.00% x 365/360 = $365,000 to the year.
The flat-rate shortcut. Holding the Q1 rate of 3.90% for the whole year gives 6.50% on 365 days: $2,372,500, which is $87,200 above the curve. On an upward-sloping curve the shortcut errs the other way and the budget comes in short, which is the more expensive mistake.
The covenant. With $3,200,000 of NOI, DSCR is 1.40x on the forward curve ($3,200,000 / $2,285,300) and 1.21x at forward plus 100 ($3,200,000 / $2,650,300). A 1.25x covenant tested on actual debt service passes on the curve and fails under stress. See DSCR and debt yield tests with lender adjustments.
The cap. Add a cap at a 4.50% strike. In the stress path SOFR runs 4.90%, 4.70%, 4.55% and 4.50%, so the loan pays 7.10% all year net of cap receipts: $36,000,000 x 7.10% x 365/360 = $2,591,500. Cap receipts are $58,800 ($36,000 + $18,200 + $4,600 + $0), and DSCR is 1.23x. The cap helps and still leaves the covenant breached, because the strike sits too high for this loan’s cushion. A lower strike fixes it, at a higher premium.
Using the curve to choose a cap strike
A cap’s price starts from where its strike sits against the forward curve, period by period. Where the curve is above the strike, the cap is expected to pay, and the borrower pays for those expected payments upfront, plus time value for the chance that rates beat the curve. Where the strike is well above the curve, the cap is cheap and pays only if rates move past the market’s price.
The order of work follows. Find the SOFR level at which each loan’s DSCR hits its covenant or its extension test. Compare it with the forward curve over the cap term. Then price strikes around that level. The pricing mechanics are in interest rate cap cost, and the portfolio side of cap management is in caps in your debt portfolio.
The same curve sets the alternative. A swap’s fixed rate is, in effect, a weighted average of the forward curve over the swap’s term, so comparing a cap budget with a swap budget is comparing two ways of paying for one curve. See SOFR swap rates and fixed-rate debt.
What to track across the portfolio
- The curve date on every budget and projection, refreshed on a schedule and after FOMC meetings.
- Each loan’s index and conventions. Term SOFR, 30-day Average SOFR and compounded SOFR in arrears respond to the same curve on different timing.
- Interest on the curve and under stress, by loan and by quarter, rolled into the portfolio cash flow projection.
- Floors. Periods where the curve runs below a loan’s floor, since the floor then sets the index.
- Cap strike against the curve, by period, with cap expiry against maturity and each extension date. See interest rate cap.
- Covenant and extension headroom in SOFR terms: the rate at which each test fails.
- Quarterly budget variance, split between curve moves and convention errors.
How this looks in LoanBoss
LoanBoss unifies loan abstracts, accounting feeds and live rates to refresh DSCR, balances, rates, mark-to-market values and cash flows automatically. Floating-rate indices, daycount conventions and business day adjustments are modeled loan by loan, and agency floaters re-amortize each month on the floating reset for that period. Hedges carry live rates and mark-to-market values, replacement cap costs sit with the hedge requirement, and replacement caps are tracked as critical dates with alerts. See loan portfolio dashboards with real-time rates.
Frequently Asked Questions
Is the SOFR forward curve the same as Term SOFR?
No. Term SOFR is one published rate per tenor (1, 3, 6 and 12 months), published each morning by CME from the prior day’s SOFR futures market. The forward curve is the full path of implied rates for each future period, built from futures and, for longer dates, SOFR swaps.
How often does the forward curve change?
Every trading day. Record the curve date on each budget and refresh on a set schedule, with an extra run after an FOMC meeting that moves the front of the curve.
Should the budget use the forward curve or a bank’s rate forecast?
Use the forward curve as the base case, because it is the rate a swap or cap is priced against. A forecast can sit beside it as a scenario.
Does the forward curve work for a loan on 30-day Average SOFR?
Yes, applied under that loan’s convention. The 30-day average is a compounded average of the prior 30 calendar days, so each payment reflects SOFR over a past window rather than the market’s expectation for the coming period. Model the lag as well as the level.
How large should the stress case be?
A parallel shift of 100 basis points over the curve is a sensible minimum. Add 200 basis points for loans close to a covenant, an extension test or a cap expiry.
Key takeaways
- The SOFR forward curve is the rate path implied by SOFR futures and SOFR swaps; CME Term SOFR is published from the same futures market.
- It is a price, not a forecast: forward rates embed a risk premium and have missed turns in policy, most sharply when rates fell fast.
- Budget floating-rate interest on the curve under each loan’s index, floor, spread, daycount and amortization, and carry a stress path beside it.
- A flat-rate budget overstates interest on a falling curve and understates it on a rising one.
- Choose cap strikes by comparing the SOFR level where DSCR fails with the forward curve, then price strikes around that level.
Related reading
- Floating-rate re-amortization and SOFR tracking
- Portfolio cash flow projections and hold/sell analysis
- Caps in your debt portfolio
- SOFR swap rates and fixed-rate debt
- Interest rate cap cost
- SOFR and floating rate in the glossary
The forward curve is the market’s price for the rate path. LoanBoss keeps every floating-rate loan on live rates, so cash flows refresh when rates move.
Sources
- Federal Reserve Bank of New York, Secured Overnight Financing Rate and SOFR Averages and Index (2026)
- CME Group, CME Term SOFR Reference Rates: Frequently Asked Questions (2026)
- CME Group Benchmark Administration, CME Term SOFR Reference Rates Benchmark Methodology, version 1.5.1 (2026)
- Alternative Reference Rates Committee, An Updated User's Guide to SOFR (2021)
- Alternative Reference Rates Committee, ARRC Formally Recommends Term SOFR (2021)
- Board of Governors of the Federal Reserve System, Heitfield and Park, Inferring Term Rates from SOFR Futures Prices, FEDS 2019-014 (2019)
- ICE Benchmark Administration, ICE Swap Rate overview (2026)