Hidden value in EURIBOR basis: are you optimising it?
Summary
A widening EURIBOR basis is creating an opportunity for borrowers to reduce funding costs in a higher-rate environment. By shifting from 3-month to 1-month EURIBOR and using a basis swap, borrowers can capture the spread and lower their effective interest expense.
Capturing value in a steep EURIBOR curve
Recent yield curve steepness, exaggerated by current market volatility — driven by geopolitical tensions and the escalation of the Iran conflict — has pushed short-term Euro interest rates higher. In this environment, opportunities to reduce borrowing costs are limited and increasingly valuable.
One such opportunity currently exists in the basis between EURIBOR terms, such as 1-month and 3-month EURIBOR. As of 31 March 2026, 1-month EURIBOR is approximately 1.89% while 3-month EURIBOR is around 2.08%. This reflects the upward-sloping yield curve and can be locked in for longer periods to create value for borrowers via the basis swap market.
Why this matters for borrowers
- Many floating-rate loans are indexed to 3-month EURIBOR (or longer tenors) by default.
- However, the lower 1-month fixing creates an immediate cost advantage.
- The spread between the two tenors represents a monetizable opportunity which can be locked in over a defined period.
How to capture the benefit
Where loan agreements allow, borrowers switch indexation on the underlying loan from the existing EURIBOR term (let’s assume 3-month) to 1-month EURIBOR.
At the same time, borrowers execute a 1-month vs. 3-month EURIBOR basis swap, allowing them to:
- Receive 1-month EURIBOR
- Pay 3-month EURIBOR [less basis swap pricing]
This generates a basis point benefit over the life of the swap, reflecting the current favourable basis differential and effectively lowering the net interest cost.
Key considerations
- The benefit is most compelling where the basis is wide relative to historical norms.
- Execution can be structured alongside existing hedges.
- Facility Agreement flexibility is critical.
- Forward curves can be used to assess the opportunity.
Takeaway
In a market where outright interest rates have risen and cost-reduction opportunities are scarce, basis optimisation is one of the few levers available to borrowers.
Where operationally feasible, switching exposure from longer tenor EURIBOR indexation to 1-month EURIBOR and transacting a basis swap can deliver meaningful savings — and may be worth evaluating alongside broader hedging strategies.
Ready to talk about EURIBOR basis?
Contact Chatham to discuss how this strategy might work for your organisation.
Disclaimers
This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.
