The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate that measures the cost of borrowing cash overnight against U.S. Treasury securities. It is calculated on the basis of actual transaction data from the repurchase agreement market, rather than the survey-based estimates that underpinned its predecessor, LIBOR — which was discontinued following a widely documented manipulation scandal. As a transaction-based reference rate, SOFR provides a more reliable indicator of funding conditions in the wholesale money market. Spikes in SOFR may signal tightening liquidity conditions and increased stress in the financial system, which can translate into headwinds for risk assets. Monitoring interbank and funding rates can therefore offer valuable insight into systemic liquidity and risk appetite. This topic is examined in Module 6.1. Further background available here.
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