(30 Day Average Rate)


July 19, 2024


SOFR Definition

What is SOFR? What is the 30 Day Average SOFR?

SOFR (Secured Overnight Financing Rate) is a benchmark interest rate used in financial markets. It is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. The SOFR rate is published daily by the Federal Reserve Bank of New York, and it is intended to replace the LIBOR (London Interbank Offered Rate) as a benchmark interest rate.

The SOFR 30-day average rate is a benchmark interest rate based on the Secured Overnight Financing Rate (SOFR). The SOFR 30-day average rate is calculated as the average of the SOFR rates observed over a 30 calendar day period. It is used as a benchmark for various financial instruments, including loans, bonds, and derivatives, and is considered a more reliable alternative to the London Interbank Offered Rate (LIBOR), which is being phased out. Be careful not to confuse it with “The SOFR Index” which is a completely different thing. 

[Here are some notes on how the average is calculated. The SOFR Averages and Index employ daily compounding on each business day. On any day that is not a business day, simple interest applies, at a rate of interest equal to the SOFR value for the preceding business day. In accordance with broader U.S. dollar money market convention, interest is calculated using the actual number of calendar days, but assuming a 360-day year. The SOFR Averages for a given publication date incorporate all the SOFR values starting exactly 30-, 90-, and 180-calendar days before the publication date, regardless of whether or not that date is a weekend or holiday, and extend through the SOFR published that day. The math is a bit complicated and can be found at the New York Fed website.]

LIBOR was phased out due to concerns about its reliability and accuracy. LIBOR has been subject to manipulation scandals, and the underlying market that LIBOR measures had become less active over time, making it harder to calculate the rate accurately. SOFR, on the other hand, is based on actual transactions in the U.S. Treasury repurchase (repo) market, which is a large and active market. This means that the SOFR rate is considered to be a more reliable and accurate measure of short-term borrowing costs than LIBOR. Additionally, the Federal Reserve has been promoting SOFR as an alternative benchmark rate, and many financial institutions and regulators have endorsed its use as a replacement for LIBOR.

Basically, the Secured Overnight Financing Rate (SOFR) is calculated as a volume-weighted median of transactions in the U.S. Treasury repurchase (repo) market.

The repo market is where financial institutions borrow and lend cash overnight, using U.S. Treasury securities as collateral. The transactions in this market provide a measure of the cost of borrowing cash overnight, which is the basis for the SOFR.

Each day, the Federal Reserve Bank of New York collects transaction data from various sources, including primary dealers and other financial institutions, and calculates the SOFR rate based on the volume-weighted median of these transactions. The volume-weighted median is a statistical measure that gives more weight to larger transactions, and it is designed to provide a representative measure of the overall cost of overnight borrowing in the repo market.


SOFR 30 Day Average Rate History

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