Secured Overnight Financing Rate
A broad measure of the cost of borrowing cash overnight secured by US Treasury collateral, published each morning by the New York Fed and the main US replacement for LIBOR.
SOFR is calculated from actual transactions across the Treasury repo market — hundreds of billions of dollars a day — rather than from a panel of banks reporting where they think they could borrow. That is precisely the flaw in LIBOR that SOFR was designed to remove.
Because it is secured, SOFR carries almost no bank credit risk. It therefore behaves differently from LIBOR in a crisis: LIBOR spikes when banks are distrusted, while SOFR can spike when collateral or dealer balance sheet capacity is scarce.
Spikes are diagnostic. When SOFR prints well above the administered floor, it is usually telling you that reserves have become scarce or that dealers cannot expand their books — as in September 2019.
The mechanics
- What it measures
- Overnight cash borrowing collateralised by Treasuries, transaction-weighted.
- Published by
- The Federal Reserve Bank of New York, each business morning.
- Reads against
- IORB and the ON RRP rate — the administered floor it should sit near.
The common misreading
That SOFR is simply the new LIBOR. It is a secured rate with no term structure of its own, which is why term SOFR had to be constructed separately and why lending spreads had to be repriced rather than merely relabelled.
Related terms
- Repurchase agreementThe sale of a security combined with an agreement to buy it back at a set price and date — legally a sale, economically a loan secured by collateral.
- Interest on Reserve BalancesThe rate the Federal Reserve pays banks on the reserves they hold with it — the administered rate that anchors the floor of the US policy corridor for banks.
- Overnight Reverse Repurchase Agreement FacilityA Federal Reserve facility where eligible non-banks lend cash to the Fed overnight against Treasury collateral, putting a hard floor under short-term interest rates.
- Quantitative tighteningThe reverse of QE — shrinking the central bank's balance sheet, usually by letting bonds mature without reinvesting, which destroys reserves.
Primary sources
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