By: Josh Cannington, VP - Interest Rate Derivatives
As of February 2026, U.S. interest rate volatility continues to pressure corporate borrowers managing floating rate debt. Basis risk is increasingly relevant as companies discover that not all SOFR exposures align perfectly with their hedge structures. Small differences in benchmark construction can introduce unexpected cash flow swings, even when a hedge appears properly executed. In an environment where funding costs remain elevated, the effectiveness of interest rate protection depends on structural precision rather than headline policy moves.
Josh Cannington, Vice President of Interest Rate Risk Management at StoneX, works directly with U.S. commercial borrowers structuring derivatives against floating rate debt. His experience advising companies on SOFR based loans and interest rate swaps provides practical insight into how basis risk emerges inside real world hedge programs and why small mismatches can carry meaningful financial consequences.
Basis risk can disrupt corporate interest rate hedges even when borrowers believe they are fully protected. Cannington explains that "basis risk is just that there's a mismatch between what you're paying on your loan and what your hedge is going to return in protect against". Specifically, a company borrowing on term SOFR but hedging with an overnight indexed compounded SOFR swap may face pricing differences that fluctuate over time. Consequently, basis risk introduces noise into hedge performance, potentially distorting cash flow forecasts and reducing the predictability that derivatives are meant to provide.
SOFR-based lending has replaced LIBOR, but structural nuances within SOFR itself can amplify basis risk. Cannington notes that "the difference in the nuances between those two SOFR indexes introduces volatility and uncertainty", underscoring how minor calculation differences matter. Although both instruments reference SOFR, the mechanics of term rates versus overnight compounding are not identical. As a result, basis risk can persist throughout the life of the hedge, reinforcing the need for borrowers to align loan documentation and derivative terms before execution.
Access live prices, supply and demand data and actionable market commentary across commodities, equities, currencies and more. Sign up for StoneX Market Intelligence today and receive a 14-day trial.
Sign up for a Market Intelligence trial today See our financial videos hub
--- Written by Lindo Xulu, StoneX TV Journalist
--- Expert: Josh Cannington, Vice President of Interest Rate Risk Management at StoneX
StoneX TV content is created, produced, and distributed solely by StoneX Media Ltd (“StoneX TV”) and is provided for informational and educational purposes only.
StoneX TV does not provide investment, financial, legal, or tax advice and does not make any recommendation or endorsement of any investment strategy, transaction, or financial instrument. Nothing in this content constitutes, or should be construed as, investment advice or a recommendation to buy, sell, or hold any financial instrument, including securities, futures, derivatives, digital assets, foreign exchange products, or CFDs.
This content does not constitute an offer, invitation, or solicitation to engage in any investment activity.
The information presented is general in nature and is not tailored to the financial situation, investment objectives, or risk tolerance of any specific person. You should not rely on this content as a substitute for independent professional advice.
Investing and trading in financial instruments involves significant risk of loss and is not suitable for all investors. Past performance is not indicative of future results.
Any views or opinions expressed are those of the presenter at the time of publication and are subject to change without notice. Such views may not necessarily reflect those of StoneX Media Ltd or its affiliates. StoneX Media Ltd and its affiliates, including StoneX Group Inc., may from time to time have positions in, or engage in transactions involving, the financial instruments referenced.
This content may include general market commentary and opinion. It does not constitute independent investment research and has not been prepared in accordance with legal requirements designed to promote the independence of investment research.
StoneX Media Ltd is not authorised or regulated to provide investment services and does not act in a fiduciary capacity.
StoneX Media Ltd is incorporated in Ireland and operates in accordance with applicable Irish law. It is a wholly owned subsidiary of StoneX Group Inc. and is a separate legal entity from other subsidiaries within the StoneX Group, which may be regulated in various jurisdictions. StoneX Media Ltd does not act on behalf of, or provide services for, any regulated affiliate.
This content is not directed at, and may not be distributed to, any person in any jurisdiction where such distribution would be contrary to local laws or regulations.
Supporting documentation for any claims, comparisons, statistics, or technical data may be made available upon reasonable request, where applicable.
Our subscribers have access to comprehensive market analysis from StoneX spanning commodities, equities, currencies and more.
Germany's 10-year yield has pushed to its highest level since October 2023, tightening financial conditions across the eurozone without any further action from policymakers. The bond market, not the policy statement, is now doing much of the work.
Pushing rates further into restrictive territory would tighten conditions on an economy that is already absorbing higher borrowing costs from the bond market. The trade-off between controlling energy-led inflation and protecting eurozone activity is where the rate path is genuinely decided.
A payrolls print that nearly tripled expectations still did not settle the September Federal Reserve question, and one dovish speech moved rate pricing further than the data did. The two U.S. inflation releases now landing in consecutive sessions are what breaks the tie.
Our market expertise, advanced platforms, global reach, culture of full transparency and commitment to our clients’ success all set us apart in the financial marketplace.
Reach
With access to 40+ derivatives exchanges, 180+ foreign exchange markets, nearly every global securities marketplace and numerous bi-lateral liquidity venues, StoneX’s digital network and deep relationships can take clients anywhere they want to go.
Transparency
As a publicly traded company meeting the highest standards of regulatory compliance in the markets we serve; our financials and record of accomplishment are matters of public record. StoneX’s commitment to “doing the right thing over the easy thing” sets us apart in the industry and helps us build respect, client trust and new partnerships.
Expertise
From our proprietary Market Intelligence platform, to “boots on the ground” expertise from award-winning traders and professionals, we connect our clients directly to actionable insights they can use to make more informed decisions and achieve their goals in the global markets.
