FX Basis Quarterly: Could next week‘s FOMC jeopardize the basis?

Research evidence excerpt

FX Basis Quarterly: Could next week‘s FOMC jeopardize the basis?

ions like 1y1y SOFR/TONAR should offer a larger

‘discount’ to spot in order to balance Sharpe ratios. For now, we think this is an

open question.

Figure 1. Typically, the XCCY basis rebounds following risk- Figure 2. Usually the 1y1y SOFR/TONAR basis widens in

off driven drawdowns. This is why we stayed paid in March risk-off events, which we proxy via VIX. Note that

and, so far, the basis has recovered. SOFR/TONAR tends to ‘recover’ when VIX falls.

30 1y1y SOFR/TONAR Cummulative Returns around S&P drawdowns, bp 15 2wk Chg in 1y1y SOFR/TONAR Returns, bp

15 5

10 0

-5 0

-5 -10

3/23/2020 10/12/2022 4/8/2025

-10 12/21/2018 2/10/2016 2/8/2018 -15

-15 9/23/2020 3/30/2026

2wk chg in VIX above 5 2wk chg in VIX below -5 0 5 10 15 20 25 30 35 40 45 -20

© 2026 Citigroup Inc. No redistribution without Citigroup’s written permission. © 2026 Citigroup Inc. No redistribution without Citigroup’s written permission.

Note: Drawdowns are calculated from high watermarks in S&P. Note: We use changes from 1y1y SOFR/TONAR total return series and VIX

levels. Data is from 2014 onwards. The “X” represents the average change,

the box represents interquartile range (with median), and the endpoints are

the range of non-outlier (defined by 1.5 x IQR) observations.

Source: Citi Research, Bloomberg Source: Citi Research, Bloomberg

In the short-term, we think the 2y SOFR/TONAR XCCY basis could widen by 2-3bp

if next week brings a risk-off event, as generally the basis widens when VIX spikes.

Effectively, we are using VIX as a risk-on/off proxy (see Figure 2). However, even in a

risk-off event next week, we struggle to see VIX moving north of 25, as we think

the move should be more contained compared to the shock from March. The risk to