Fed makes smaller rate increase and signals more to come; interest rate and pricing inversions abound

February 15, 2023

The Takeaway provides practical commentary on interest rates, derivatives and capital markets activities. These insights come from the professionals in CoBank’s Treasury and Capital Markets groups—people who are in the market interacting with customers, investors and other lenders seeking to understand what is driving activity.

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It’s not me, it’s you. Does the Fed have a credibility issue?

As widely expected, the Fed raised its benchmark interest rate 25 basis points to a level between 4.5% and 4.75% at its February 1 meeting in its continuing effort to ease stubborn inflation.

In comments following the meeting, Chairman Jerome Powell said there is still more work to do to reduce inflation, which jumped by 7.5% year over year in January. Powell strongly signaled what is likely to be another 25-basis-point increase at the next Fed meeting in late March.

Once again, however, the interest rate and equity markets reacted with a strong sense of doubt that the Fed would, indeed, continue to increase rates. The result was a short-lived rally in equity and interest rate markets, with two-year Treasury rates decreasing by 10 basis points to 4.1%.

But just two days later, startling news that 517,000 new jobs were created in January and unemployment had dropped to 3.4% brought expectations back to normal, with two-year Treasury rates rising by 35 basis points.

“This isn’t the first time financial markets have responded to the Fed’s guidance with disbelief,” said Jeff Milheiser, vice president, Funding & Investments in the Treasury group at CoBank. “The reaction is odd because the Fed has gone to great lengths to explain what they’re doing and not surprise the market with unexpected moves. It does, however, explain the high level of volatility we’ve been seeing, and which we continue to expect throughout 2023.”

Milheiser added that January’s strong job numbers are contributing to a sense among market participants that there is a greater possibility of a soft landing from what has been a 40-year high for inflation. A soft landing is defined as a slowing of economic growth prompted by higher interest rates, but with less of a negative impact on employment. 

Despite this sentiment, CoBank is still expecting a recession in 2023, although occurring later in the year than previously thought. 


On February 14, the Bureau of Labor Statistics reported that the Consumer Price Index—one of the primary gauges of annual inflation—was 6.4% for January, the seventh straight monthly decrease. 

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Customers ask, “What are my option options?”

The continuing rise in interest rates—although now at a slower pace than in 2022—is prompting some CoBank customers to consider different interest rate risk management strategies, according to Eric Nickerson, CoBank’s sector vice president of customer derivatives.

“We've begun seeing more interest in options as opposed to just straightforward interest rate swaps,” Nickerson said. “Some variable-rate borrowers are hedging their risk using interest-rate caps and coupling those caps with a floor to create an interest-rate collar. With the continued inversion of the yield curve, these kinds of option-based strategies are generating quite a bit of interest.”

Nickerson added that another dominant theme among customers is the move away from LIBOR (London Interbank Offered Rate), which will phase out in June 2023.

“The phase-out of LIBOR in June has created some new urgency to make the shift to SOFR (Secured Overnight Financing Rate),” said Nickerson. “It’s been a bit of a frustrating process for customers because the transition isn’t very straightforward. The mechanics of the two rates can be very different, and there are quite a few moving parts in the transition process. Unfortunately, LIBOR is going away, so the change is unavoidable. But we’re here to help our customers get through it.”

Lastly, according to Nickerson, some customers that locked in swap rates at very low levels before or toward the beginning of the tightening cycle have begun to think that the Fed’s tightening may be overdone. Some customers are considering unwinding their in-the-money swaps based on a view that the Fed will need to embark on an aggressive easing cycle in short order.

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What BWICs tell us about secondary and primary loan market activity.  B… what now?

The secondary loan market allows banks and other institutional investors—such as collateralized loan obligation funds (CLOs), private debt lenders, insurance companies—to buy or sell loan exposure after the primary new issue loan has closed.  

A strong gauge of lender interest in the secondary loan market is an activity that is oddly named Bids Wanted in Competition, or BWIC (pronounced: bee-wick). 

“The BWIC name belies a fairly simple concept,” said Clarence Plummer, senior vice president, Capital Markets for CoBank. “As a CLO matures and rolls off toward the end of its life—say, a 10-year average life—there is a basket of stub loan pieces typically ranging in size from a few hundred thousand to $1-2 million. Rather than continuing to manage the loan stubs, the CLO owner solicits bids—BWICs—and sells the individual loans to the highest bidder in the secondary loan market, transferring the stub loans to the winning bidder via assignment. 

“A good gauge of market demand and secondary market appetite is how well BWICs are absorbed by the market,” Plummer continued. “A well-bid BWIC is a good sign. A poorly bid BWIC is a poor sign.”

Plummer added that although BWIC activity as a market gauge most accurately reflects activity among investment vehicles of like credit quality, he said the current strong interest in BWICs reflects the strong secondary loan market activity that occurred in January.

Secondary loan market expert joins CoBank

Plummer also noted that, reflecting CoBank’s increased activity in the secondary loan market, Todd Helman has joined his Capital Markets team as lead relationship manager for Loan Sales and Trading. Helman is responsible for facilitating secondary loan market transactions across CoBank lending units, Farm Credit System lenders, commercial banks, insurance companies, community banks, direct lenders and CLOs. 

Prior to joining CoBank, Helman was a managing partner at Waveson Capital, focused on secondary loan activity for commercial and community banks in performing, stressed and distressed situations. Previously, he ran the Loan Sales and Trading Desk at Huntington National Bank, executing par and distressed trades across industry verticals. Helman also worked in the Leveraged Finance Group at BBVA, structuring and executing leveraged transactions across various industries.

“Todd’s expertise is a big step in building our capital markets presence and acumen,” said Plummer.

Market Focus


Price inversion for some top grains sends strong sell signal

Significant uncertainty over the prospect of crop planting in Ukraine, questions about the size of the South American harvest, and China’s enigmatic supply-and-demand scenario, have the global grain market in a state of flux. 

According to Eric Gorman, senior transaction origination management officer in CoBank’s Capital Markets division, several years of drought and lingering logistics issues have affected grain production in Brazil and Argentina, two significant players in the global grain market. And Russia’s threats to escalate the war in Ukraine have created considerable doubt over whether Ukrainian farmers will plant any crops in the upcoming planting season.

As of early February, these global market dynamics resulted in price inversions for corn and soybeans, two of the three most heavily traded grain commodities. Wheat, also one of the big three, was seeing normal pricing dynamics where later-dated contracts are priced higher than close-in contracts.

“Purchasers want to lock in their supply, so the market is telling grain merchandisers to sell now,” said Eric Gorman, “In a normal pricing environment, grain merchandisers would sell in stages and hold some inventory for higher-priced contracts later in the year. With the price inversion, the carry in the market that compensates merchandisers for the cost of holding the grain just isn’t there. The message is, sell early, sell often.”

Pricewise, Gorman said grain prices have generally come down from their near all-time highs in Q4 of 2022, despite the current supply uncertainties.

Recent CoBank Capital Markets Activity

International Paper Company

International Paper Company

$600M Credit Facility
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Rayonier, Inc.

Rayonier, Inc.

$250M Credit Facility
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Darling Ingredients

Darling Ingredients

$300M Credit Facility
Joint Lead Arranger & Bookrunner


Update: USDA ReConnect

The USDA established the ReConnect Loan and Grant Program to provide loans, grants and loan-grant combinations to facilitate broadband deployment in areas of rural America that do not have sufficient access to broadband.

In 2023, USDA will make additional funding available for high-speed internet in the fourth round of funding for the ReConnect Program. The department will award up to $150 million in loans, up to $300 million in loan/grant combinations and up to $700 million in grants. 

The department is using funds appropriated under the Bipartisan Infrastructure Law, also known as the Infrastructure Investment and Jobs Act. The Bipartisan Infrastructure Law provides $65 billion to expand affordable, high-speed internet to all communities across the U.S. The application deadline for the fourth round of funding was November 2, 2022. Awards will be announced in the coming months.

In October 2022, the USDA announced that part of its third round of ReConnect funding would provide $759 million to bring high-speed internet access to people in 24 states, Puerto Rico, Guam and Palau. The awards were part of $1.6 billion that was available from the third round of ReConnect funding, which supported 101 projects in 31 states and territories.

“CoBank is ready and willing to assist customers with potential ReConnect program needs, including letters of credit and necessary match funding,” said Gary Franke, managing director, Communications division with CoBank.

Recent CoBank Capital Markets Activity

i3 Broadband

i3 Broadband

$270M Credit Facility
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United Communications

United Communications

$90M Credit Facility
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$205M Credit Facility
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Power & Energy

It’s a new year…but is it really?

A new year brings new budgets, new outlooks and, hopefully, some new optimism. The issue, of course, is that market conditions and deal dynamics don’t watch the calendar. A leveraged finance deal—say, a Twitter or Tenneco—that went south last year doesn’t begin to look any better just because the calendar flipped. 

Banks do watch the calendar, but some of them are operating with a sense of hesitance, as though it’s still 2022. Unfortunately, some of the dynamics of last year’s market caused some money center banks to temper their appetite for even investment-grade syndicated loan deals.

But, according to Bill Fox, managing director of Capital Markets with CoBank, there is room for optimism for an improving market in 2023.

“The question of whether commercial banks are approaching 2023 with a sense of optimism or a sense of fear is still unanswered,” said Fox. “However, we’re in a different time and place, and the banks are looking differently at the Twitter or Tenneco paper that last year was attracting offers of only 85 or 90 cents on the dollar. The market caused them to hold on to that paper with the hope of getting a better price later.

“Now, those lenders are in a position of having to move that 2022 paper in order to get on with 2023 business, so the question becomes not if but when they’ll make their move,” Fox added. “As that paper eventually moves through the system, it should remove some of the overhang—banks should become more willing to lend. There’s still some wait-and-see to be expected.” 

Fox also cited stronger equity market performance, easing inflation and an expected slowing in interest rate increases as signs that market conditions may ease somewhat.

While some power and energy providers have opted to keep large capital expenditures on hold, Fox mentioned that CoBank has been able to help other borrowers to keep moving forward with their expansion plans. Fox added, “The benefit to our customers is that CoBank and our partners in the Farm Credit System are not burdened with the overhang that many commercial and investment banks saddled themselves with in 2022, and we continue to be supportive lenders. We are willing to step up where others are stepping back.”

Recent CoBank Capital Markets Activity

VP-Arica Class B, LLC

VP-Arica Class B, LLC

$1.03B Credit Facility
Joint Lead Arranger

Tri-County Electric Cooperative

Tri-County Electric Cooperative

$585M Credit Facilities
Administrative Agent

ES1B Finance, LLC

ES1B Finance, LLC

$857.98M Credit Facility
Coordinating Lead Arranger

DISCLAIMER: The information provided in this publication is for informational purposes only and is not to be used or considered as investment research, a proposal, or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. Companies and transactions referenced in this publication are shown for illustrative purposes only, and the provision of such information is not a recommendation or endorsement in this context. Certain information contained in this publication has been obtained or derived from third-party sources, and such information is believed to be correct and reliable but has not been independently verified. While CoBank believes that factual statements in this publication, and any assumptions on which information in this publication is based, are in each case accurate, CoBank makes no representation or warranty regarding such accuracy and shall not be responsible for any inaccuracy in such statements or assumptions. Note that CoBank may have issued, and may in the future issue, other reports that are inconsistent with or that reach conclusions different from the information set forth in this publication. CoBank is under no obligation to ensure that such other reports are brought to your attention. Furthermore, the information may not be current due to, among other things, changes in the financial markets or economic environment, and CoBank has no obligation to update any such information contained in this publication. This publication is not intended to forecast or predict future events.

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