SOFRSOFR
SOFR, the Secured Overnight Financing Rate, is a benchmark for the cost of borrowing US dollars overnight against Treasury collateral. It is published daily by the Federal Reserve Bank of New York and replaced USD LIBOR in most contracts.
Floating-rate loans, bonds and derivatives need a reference rate that resets over time. In US dollars, that reference is now mostly SOFR. It is based on real overnight lending secured by Treasuries, which makes it hard to manipulate. This entry explains how SOFR is set, why it replaced LIBOR, and how it flows into the interest that borrowers pay.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Secured Overnight Financing Rate
- Updated
SOFR in plain words
SOFR measures what it costs to borrow cash overnight when the loan is backed by Treasury securities.1 Those overnight secured loans are called repurchase agreements, or repos. See Treasury Bills, Notes and Bonds.
A floating-rate loan typically pays SOFR plus a fixed margin. When SOFR rises, the borrower pays more; when it falls, they pay less. See Interest Rate.
How SOFR is set and used, step by step
Collect repo trades
The New York Fed gathers overnight Treasury repo transactions from several data sources.1
Take the median
SOFR is the volume-weighted median rate of those trades.1
Publish daily
The rate is published each business day at around 8:00 a.m. New York time.1
Average or compound
Contracts often use compounded SOFR averages over 30, 90 or 180 days.2
Add the margin
The contract adds its fixed spread to get the rate actually paid.
Reset each period
The rate is recalculated at every reset date.
Worked examples
Example 1 — A floating-rate loan
Cost of borrowingA company borrows $1,000,000 at SOFR + 1.50%. SOFR averages 4.30% over a 90-day period (actual/360 day count).
| Rate paid | 4.30% + 1.50% = 5.80% |
| Interest | $1,000,000 × 5.80% × 90 ÷ 360 = $14,500 |
The borrower pays the benchmark plus its own credit margin.
Example 2 — SOFR rises
Higher costSOFR averages 5.30% in the next period instead.
| Rate paid | 5.30% + 1.50% = 6.80% |
| Interest | $1,000,000 × 6.80% × 90 ÷ 360 = $17,000 |
A one-point rise in SOFR adds $2,500 to the quarter’s interest. Floating-rate borrowers carry rate risk.
Example 3 — Using the SOFR Index
CompoundingThe SOFR Index is 1.0500 at the start of a period and 1.0605 at the end.
| Compounded return | 1.0605 ÷ 1.0500 − 1 = 1.0% |
The index tracks compounding over time, so the ratio of two values gives the compounded SOFR for the period.2
SOFR vs. LIBOR
| Aspect | SOFR | USD LIBOR |
|---|---|---|
| Based on | Actual overnight repo trades | Bank submissions |
| Secured? | Yes, by Treasuries | No, unsecured |
| Term | Overnight (averages or Term SOFR for longer) | Several terms, such as 3-month |
| Status | Main USD benchmark | Panel settings ended in 2023 |
Where SOFR matters
Loans and floating-rate notes
Coupons reset at SOFR plus a spread.
Derivatives
Interest-rate swaps and SOFR futures reference it. See Futures Contract.
Policy signal
SOFR moves closely with the Fed’s policy rate. See Federal Reserve.
Funding stress
Sudden spikes can signal tight funding in the repo market.
Advantages and disadvantages
Advantages
- Based on a large volume of real transactions.
- Hard to manipulate compared with submission-based rates.
- Published daily by the New York Fed.
Disadvantages
- Overnight by nature, so longer periods need averaging or Term SOFR.
- Almost risk-free, so it does not reflect bank credit risk.
- Can spike at month or quarter ends when funding is tight.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why it is called “secured”
Beginner
The loans behind SOFR are backed by Treasury collateral, so the rate contains very little credit risk.1
Why LIBOR was replaced
Intermediate
Common mistakes
Treating SOFR like LIBOR
SOFR has no bank credit component, so spreads over it are wider.
Ignoring the day count
Interest is often calculated on actual/360.
Forgetting reset risk
Floating-rate costs change at every reset.
Reading one day’s spike as a trend
Month-end funding pressure can be temporary.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- SOFR is the main US dollar benchmark interest rate.
- It measures overnight borrowing backed by Treasuries.
- The New York Fed publishes it every business day.
- It replaced LIBOR, whose USD panel settings ended in 2023.
- Floating-rate contracts usually pay SOFR plus a fixed spread.
Frequently asked questions
Who publishes SOFR?
Is SOFR the same as the Fed funds rate?
What is Term SOFR?
Further learning
- Interest Rate
How interest rates work in general.
- Federal Reserve
The central bank behind US policy rates.
- Treasury Bills, Notes and Bonds
The collateral behind SOFR.
- Credit Spread
The margin added above benchmark rates.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Federal Reserve Bank of New York. Secured Overnight Financing Rate Data (opens in a new tab) Checked .
- Federal Reserve Bank of New York. SOFR Averages and Index Data (opens in a new tab) Checked .
- Alternative Reference Rates Committee. Transition from LIBOR (opens in a new tab) Checked .
- Alternative Reference Rates Committee. About the ARRC (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.