SOFR is the Secured Overnight Financing Rate, the volume-weighted median cost of borrowing cash overnight collateralised by US Treasuries in the repo market. Published daily by the New York Fed, it is the dollar replacement for LIBOR and the benchmark underpinning most dollar derivatives and floating-rate debt.
How it works
SOFR is calculated as the volume-weighted median of overnight Treasury repo transactions — tri-party repo, GCF repo, and bilateral cleared trades — covering roughly $2 trillion in daily volume. Because it is secured by Treasury collateral, it carries no bank-credit premium, unlike LIBOR. Derivatives reference compounded-in-arrears SOFR or SOFR futures; floating-rate notes typically use a daily compounded average over the interest period.
Why it matters now
Through 2025–2026 SOFR is the live gauge of money-market tightness as QT drains reserves: SOFR printing at or below IORB signals abundant cash, while SOFR spiking above IORB warns reserves are approaching scarcity and the Fed may slow or end runoff.
Example
In the September 2019 repo episode — before SOFR fully replaced LIBOR — overnight Treasury repo spiked toward 10%, far above the roughly 2.10–2.35% policy band, forcing the Fed to inject liquidity. By contrast, through much of 2024–2025 SOFR has printed a few basis points below IORB (e.g. SOFR near 4.83% versus IORB at 4.90%), signalling that cash still exceeded collateral demand and reserves remained ample.
Frequently asked
- What is SOFR?
- SOFR is the Secured Overnight Financing Rate, the volume-weighted median cost of borrowing cash overnight against US Treasury collateral in the repo market. Published each morning by the New York Fed, it reflects roughly $2 trillion of daily transactions and serves as the dollar replacement for LIBOR across derivatives and floating-rate debt.
- How does SOFR differ from LIBOR?
- SOFR is a secured, transaction-based rate, while LIBOR was an unsecured, survey-based estimate of bank borrowing costs. SOFR carries no bank-credit premium because it is collateralised by Treasuries, so it does not jump in banking stress the way LIBOR did in 2008. USD LIBOR panels ceased in June 2023, leaving SOFR dominant.
- Why does the SOFR-IORB spread matter?
- The SOFR-minus-IORB spread is the cleanest real-time gauge of reserve scarcity in the dollar system. When SOFR prints below IORB
Glossary · IORB
IORB is the rate the Federal Reserve pays banks on balances held in their master accounts. It is the Fed's primary administered tool for steering the federal funds rate, setting an effective floor under money-market rates by making reserves a risk-free yielding asset.
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- What caused the September 2019 repo spike?
- The September 2019 repo spike was driven by a collision of corporate tax payments and a large Treasury settlement that drained reserves below the system's comfort level. Overnight Treasury repo surged toward 10%, far above the roughly 2.10-2.35% policy band, forcing the Fed to inject liquidity and later restart reserve-management asset purchases.
- How is SOFR used in derivatives and loans?
- SOFR is referenced as a compounded-in-arrears average over the interest period rather than as a forward-looking
Glossary · ex ante
Ex ante means "before the event" — an assessment, expectation, or probability formed in advance, using only information available at the time, before outcomes are realized. It contrasts with ex post, which evaluates the same quantity after the fact, with hindsight and realized data.
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