How Should Bond-Proceeds Reinvestment Change When Rates Rise or Fall?

A change in the direction of rates changes the pricing an issuer is offered and the term that fits its fund, not what the proceeds may be invested in or how the arbitrage rules apply.

In a rising-rate environment, floating positions and maturing short terms re-price upward while fixed rates hold at their bid level; in a falling-rate environment, fixed rates bid before the decline hold and floating positions follow the published benchmarks down.

For this page, a rate environment is the direction those benchmarks are moving, and the two it tracks are Treasury's official yield curve and the New York Fed's SOFR: Treasury builds the curve from quotes the New York Fed collects at or near 3:30 p.m. each trading day, the New York Fed publishes SOFR each business day, and both are collected on the today's rates page.

The frame around both moves stays fixed: safety first, then liquidity, then yield, in the order the strategy priorities page sets out, with the permitted-investment list and the arbitrage windows written by the bond documents and the Treasury regulations rather than by the rate outlook.

Should bond proceeds be locked at a fixed rate or left floating?

The lock-versus-floating choice decides who carries rate risk while proceeds wait to be spent: a fixed rate holds the credited rate at its bid level for the term, and a floating position moves with its benchmark.

When rates rise, floating positions earn each new print and fixed-rate contracts keep paying the rate bid at closing.

When rates fall, the two swap sides: fixed-rate contracts keep their rate and floating positions re-price downward.

One floating-rate benchmark for these positions is SOFR, which the Federal Reserve Bank of New York defines as a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.

The New York Fed publishes SOFR at approximately 8:00 a.m. ET each business day, computed as a volume-weighted median of overnight Treasury repo transactions.

It also publishes SOFR Averages and a SOFR Index shortly after each daily print: the index compounds each business day from a base value of 1.00000000 on April 2, 2018, SOFR's first value date, and the first official index value was published on March 2, 2020.

LAIF deposits share in apportioned earnings rather than earning a contract rate: the LAIF Information Digest says earnings are apportioned quarterly in proportion to amounts deposited and time on deposit, and the California State Treasurer posts the PMIA daily effective yield and the LAIF quarterly apportionment rates online, so a LAIF participant can read each quarter's apportionment rate where the Treasurer publishes it.

Fixed pricing comes from the other side of the split: the MSRB's glossary defines a guaranteed investment contract as an investment, secured by a contract with a financial institution, that guarantees a fixed rate of return and a fixed maturity, the general definition the GIC page presents.

A fund that spends on a draw schedule can blend the two sides: balances needed for near-term draws stay liquid, and balances waiting for later draws sit in term positions sized to them, which is the structure question the construction fund and GIC withdrawal provisions pages cover.

One legacy wrinkle sits on the floating side: U.S. dollar LIBOR panels ended after June 30, 2023, and under the LIBOR Act the Federal Reserve Board adopted a final rule on December 16, 2022 selecting SOFR-based replacement rates for "tough legacy" contracts without workable fallbacks.

How any particular investment agreement or swap moved off LIBOR depends on its fallback language, so the terms of a legacy position after the transition sit in its own contract.

For bonds with an integrated qualified hedge, Treasury's LIBOR-transition regulation adds a tax rule: under 26 CFR 1.1001-6(c)(1)(iv), a covered modification of a qualified hedge, or of the tax-advantaged bonds the hedge is integrated with under §1.148-4(h)(1), is treated as not terminating the qualified hedge under §1.148-4(h), as long as the modified hedge still qualifies within the regulation's 90-day window.

Whether a given modification is covered, and what it does to an issue's tax position, is a determination for bond counsel and tax counsel, and the SOFR page carries the benchmark detail.

How does the yield curve shape the investment term?

The curve is the market's price list for term, and its shape on the day of a bid shows how much more, or how much less, each longer maturity pays than the shorter ones.

The reference curve is Treasury's official yield curve, a par yield curve derived using a monotone convex method from indicative, bid-side market price quotations on the most recently auctioned securities, collected by the New York Fed at or near 3:30 p.m. each trading day.

The inputs are quotes rather than executed trades, and Treasury revised the methodology description on February 18, 2025.

By definition, a steep curve pays more for term than the short end and an inverted curve pays less, so extending a maturity when the curve is inverted means accepting a lower rate to hold it longer.

Term does not price on its own: an investment can run only as long as the proceeds can stay invested, which the draw schedule and the issue's temporary periods drive.

For yield-restricted proceeds, the SLGS option prices off a rule-defined rate: 31 CFR 344.1 defines the SLGS rate as the current Treasury borrowing rate, less one basis point, as released daily by Treasury in a SLGS rate table, and set at zero when that computation would be negative.

The zero floor came from the 2012 final rule (77 FR 33634, June 7, 2012), adopted because market conditions could have produced negative SLGS rates, and the preamble to the 2024 final rule says the one-basis-point spread has applied since 2005.

Treasury determines the current Treasury borrowing rate itself, and for maturities Treasury does not issue it may use proxies, so the SLGS rate is not defined off the published par curve and is not a published market yield.

In a falling environment the rate table follows Treasury's borrowing costs down by construction, and the zero floor applies only when the current Treasury borrowing rate less one basis point would be negative; the daily SLGS rate table shows the prints and the SLGS page covers when the securities fit a fund.

Access to a term can also close for reasons unrelated to rates: 31 CFR 344.2(l) reserves Treasury's right to change or suspend the SLGS offering at any time the Secretary determines that the issuance of obligations sufficient to conduct the orderly financing operations of the United States cannot be made without exceeding the statutory debt limit.

In that contingency, Treasury may move unredeemed Demand Deposits into special 90-day certificates of indebtedness under 31 CFR 344.7(b), which earn simple interest at the daily factor in effect when Demand Deposit issuance was suspended and roll over if the contingency continues.

What do Fed rate cuts do to GIC pricing?

A cut moves the published prints first, and the pricing reaches an issuer through the same competitive process: GIC pricing arrives as bids, which the GIC rates page details, and each bid is an offer made in the market of its own bid day.

The prints restate daily: SOFR is published at approximately 8:00 a.m. ET each business day, and Treasury's par curve is rebuilt from quotes collected at or near 3:30 p.m. each trading day, so a solicitation taken after a policy change is quoted against a different set of levels than one taken before it.

For proceeds already invested, a cut splits positions the way the first section described: fixed-rate contracts keep their contracted rate for the term, and floating positions follow the published benchmarks down.

For proceeds not yet committed, the timing question becomes the pricing question: when to solicit is the bid timing page's subject, and the forward delivery agreement page covers the structure for proceeds that arrive on a later date.

On the yield-restricted side, the spread between the bond yield and the prints is what negative arbitrage measures: proceeds invested below the interest the bonds pay are carrying it, and that page covers where it shows up and what narrows it.

And because each bid speaks for its own day, evaluation compares rate and non-rate terms against the written specifications, which the evaluating bids page covers.

Who makes which call when rates move?

The legal lines come first: which investments an issue may buy, and how the arbitrage rules treat a proposed position, are determinations for bond counsel and tax counsel.

The structure judgment is the issuer's: how much of a fund can sit in term positions against the draw schedule, and how much must stay liquid, is a call the issuer makes with its advisors under the documents' permitted-investment list.

Where a competitive bid is the next step, mGIC's Bidding Agent work covers bid specifications, soliciting qualified providers and comparing bids on rate and non-rate terms, as the Bidding Agent page describes.

mGIC is an independent, SEC-registered municipal advisor that sells no investment product and does not act as principal in the investments it evaluates.

mGIC's daily rate-update emails carry Treasury yields, SOFR and SLGS links each business day, so the prints behind these decisions arrive assembled rather than gathered.

Issuers that want a second read on how their current investments and remaining draws sit in the present environment can talk to mGIC about a free, no-obligation reinvestment review, or start with the existing investment review checklist.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.