SOFR — Secured Overnight Financing Rate

Think of it this way

It is the real price, not the list price. The official sign may say one thing, but if every stall in the market charges you more, the conclusion is simple: there is little merchandise left.

What is SOFR — Secured Overnight Financing Rate?

It is the average interest rate at which financial institutions lend each other money overnight, putting up Treasury bonds as collateral. It is calculated on more than a trillion dollars of real transactions every day, so it is a genuine market price, not a survey.

How to read SOFR — Secured Overnight Financing Rate

A daily line that closely tracks the Fed's target rate. The interesting part is the deviations: quarter-end spikes, jumps on tax dates and, above all, any sustained gap above IORB. Lag: none; a rate is priced in on the same day.

What SOFR — Secured Overnight Financing Rate means for the market

It is the pulse of the funding system. When SOFR trades above IORB, it means some institutions are willing to pay more than the risk-free rate to get cash, that is, cash is scarce. The Cash Scarcity SOFR - IORB chart sustained above 5 basis points is a serious warning of reserve scarcity.

Where the money flows

Between private institutions, with collateral and without the Fed taking part. Example: a money market fund lends 5 billion tonight to a dealer that needs to finance the bonds it holds; the dealer hands over those bonds as collateral and gets them back tomorrow when it repays the money. The Fed neither puts in nor receives a dollar: it only measures the average price of thousands of transactions like that one.

What to watch in SOFR — Secured Overnight Financing Rate

Overlay IORB and look at the distance, not the level: the level is set by the Fed and tells you nothing. What is informative is when SOFR breaks away above it, because it means some cannot find cash at the official price. That is what the spread chart is for: it is that same distance, already calculated.

It is the real market price of overnight money. If it rises above IORB, there is strain.