sofr
The price of US dollars for one night, backed by Treasuries, and the starting point for every USD funding leg.
concept note · live rateswhat it is
SOFR, the Secured Overnight Financing Rate, is what it costs to borrow US dollars for one night when you hand over US Treasuries as collateral. That kind of deal is a repo. The New York Fed collects actual repo trades, trillions of dollars a day, and publishes the volume-weighted median each morning for the previous business day.
Two words carry the meaning. Secured: the lender holds Treasuries, so there's almost no credit risk in the rate. Overnight: it's a one-day price, so there's no view on the future built into it either. That makes it close to a pure price of dollars.
Imagine a pawn shop where people leave gold bars overnight and borrow cash against them. The shop barely cares who you are, because it holds the gold. So the interest rate isn't about your creditworthiness. It's about how much cash is around versus how many people want it tonight.
SOFR is that rate, with Treasuries instead of gold. When the Fed moves its policy rate, the shop's price moves with it almost one for one.
sofr and its compounded averages
Three years, daily. The steps down are Fed cuts passing straight through.
how to read it: the blue line is noisy: look for small spikes at month- and quarter-ends, when banks shrink their balance sheets and cash gets briefly scarce. The averages smooth that out, and they lag. The 90-day line is roughly what a swap that reset quarterly actually paid over the last quarter.
Source: Federal Reserve Bank of New York. SOFR and SOFR Averages.
the part that confused me: you only know the rate afterwards
SOFR replaced USD LIBOR, which stopped being published in June 2023. LIBOR was a term rate: on day one you knew what three months of borrowing would cost. SOFR is overnight only. So a swap that resets quarterly can't use "today's SOFR". It compounds each day's SOFR across the period and settles at the end. That's called compounded in arrears.
LIBOR was also a survey: banks said what they'd pay, which is what made it manipulable. SOFR is built from real transactions. You trade certainty up front for a rate nobody can make up.
LIBOR was a fixed fare quoted before the ride. SOFR is the meter: fair, honest, impossible to rig, but you only see the total when you arrive. That's why most swap confirmations pay the funding leg a couple of days after the period ends. The meter needs to stop first.
dᵢ is the number of days each rate applies for (3 over a weekend), D is the days in the period. USD money-market convention is ACT/360, so a year of interest is paid over 365 days but divided by 360.
how it reaches an equity position
A prime broker lending you money to buy US stock, or a dealer giving you a US equity swap, charges SOFR + a spread. The spread (say 30–60bp for an ordinary fund on liquid names) pays for the dealer's own funding above SOFR, the balance sheet the position uses, and profit.
The other direction works too. If you short a stock, you receive cash, and that cash earns SOFR minus a spread. So when SOFR moved from near zero to above 5%, short sellers went from earning nothing on their cash to earning a real return on it. Rates don't just change the cost of longs. They change the income on shorts.
- SOFR = the overnight price of dollars when Treasuries are the collateral.
- It's measured from real trades, not a survey, so it can't be made up the way LIBOR was.
- It's overnight, so swaps compound it over the period and settle once the period ends.
- A USD long via swap pays roughly SOFR + spread, around 4.07% today at an illustrative 45bp.