Sofr rate
Family IX · Macro
Not to be confused with exchange rate, floating exchange rate, inflation rate.
SOFR rate is the secured overnight financing rate, a reference rate for US dollar borrowing that is calculated from actual transactions in the Treasury repurchase agreement market. It is published each business day by the Federal Reserve Bank of New York and serves as a benchmark for a wide range of financial contracts, including loans, derivatives and securities. Unlike some older benchmarks, it is based on observable market transactions rather than panel submissions.
How the SOFR rate is determined
The SOFR rate is derived from overnight repurchase agreement (repo) transactions collateralised by US Treasury securities. These transactions are cleared through the Depository Trust & Clearing Corporation (DTCC) and the data is used by the Federal Reserve Bank of New York to calculate a volume-weighted median rate. The rate is published at approximately 8:00 AM Eastern Time each business day, reflecting activity from the prior trading day. Because it is based on actual trades, it is considered a robust and transparent benchmark.
SOFR rate in practice
SOFR is used as the reference rate for various financial products, often quoted as a compounded average over a period. For example, a loan might pay a spread over compounded SOFR. The rate itself is an overnight rate, but term versions and averages are published to support different contract types. The transition from LIBOR to SOFR has been a major change in financial markets, with many contracts now referencing SOFR.
Worked example: compounding SOFR over a week
Suppose the overnight SOFR rate is published for five consecutive business days as follows: 5.30%, 5.32%, 5.31%, 5.33%, 5.34%. The compounded average over the week is calculated by compounding the daily rates. For a notional principal of $10,000,000, the interest for the week is:
The compounded average rate for the week is approximately 5.32% (annualised, using a 360-day year).
Often confused with
- exchange rate
- An exchange rate is the price of one currency expressed in another, used for converting money across borders, whereas SOFR is an interest rate benchmark for dollar borrowing; the visible sign is that an exchange rate is quoted as a currency pair, such as EUR/USD.
- floating exchange rate
- A floating exchange rate is a currency regime where the market determines the exchange rate, while SOFR is a specific interest rate benchmark; the visible sign is that a floating exchange rate is described as a system, not a single number.
- inflation rate
- An inflation rate measures the percentage change in the general price level over time, whereas SOFR is a secured overnight borrowing rate; the visible sign is that inflation is reported as an annual or monthly percentage change in a price index, not as a daily transaction-based rate.