Secured Overnight Financing Rate (SOFR) Spot

The Secured Overnight Financing Rate, sometimes referred to as overnight SOFR, or just SOFR, is the rate derived from collateralized borrowing and lending transactions in the U.S. Treasury repurchase agreement (repo) market. These transactions, where investors offer this short term capital, are then tabulated and used to calculate the volume-weighted median rate. The New York Fed began publishing SOFR on April 3, 2018, replacing the Effective Federal Funds Rate (EFFR) as the reporting rate for the U.S. Treasury repo market. See here for more on how SOFR is calculated.

Repurchase (repo) agreements are those in which a party sells a collection of high quality debt securities with an agreement to repurchase them at a later date. The seller gets short term capital and the buyer is able to earn interest on cash it would otherwise have on hand. The Federal Reserve can enter into these agreements with the intent of influencing the ceiling interest rate by which banks loan money to other banks. Reverse repo transactions reverse the party receiving the cash, and provides the Federal Reserve a mechanism to influence the floor rate of the reverse market. This means that the Federal Reserve can artificially lower the repo rate of the market when necessary (encouraging borrowing and increasing liquidity), and on the other end raise the interest rate when necessary (encouraging saving and lowering liquidity, by enticing more banks to park cash at the Fed).

This rate not only directly influences the cost of borrowing money between banks (repo market), but also the rates and costs associated with mortgages, credit card dept, student loans, and many other forms of consumer debt. Notably this rate also affects interest-rate swaps, where parties agree to exchange a fixed rate payments for floating rate interest payments, with the floating rate being pegged to SOFR with modifiers based on credit worthiness of the parties.

In the mid 2010s there was concerted effort to find a replacement for U.S. dollar LIBOR due to a number of issues including: concerns of manipulation incentive from panel banks, limited unsecured short term lending volumes between banks after the Great Recession, and tighter regulation leaving banks with little incentive to contribute to USD LIBOR panels. This culminated in the Financial Stability Board (FSB) undertaking a review of the major interest rate benchmarks of the time to investigate alternative rates. More on the creation of SOFR.

The SOFR rate is tied to transactions in the Treasury repurchase market. This market activity occurs on business days. With official values being released by the New York Fed around 8:00 AM Eastern on business days in which the Treasury repo market is open.