What Is SOFR and How Is It Used?
What is SOFR?
SOFR is based on overnight transactions in the U.S. dollar Treasury repurchase market (Repo). It is the largest rates market at a given maturity in the world, averaging roughly $1 trillion of transactions every day.
SOFR measures the cost of borrowing cash overnight collateralized by Treasury securities. SOFR is a risk-free rate (RFR) that does not contain material term risk or bank-credit risk.
How is SOFR Used?
The secured overnight financing rate, SOFR, is a benchmark used by financial institutions to price loans for businesses and consumers.
Which SOFR Rates Do Lenders Use?
The acronym “SOFR” itself can be misleading as it may refer to several different rates. In more specific terms, lenders use the following three types of SOFR rates to calculate interest:
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Term SOFR
Term SOFR is a forward-looking interest rate based on estimates of overnight SOFR.
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Daily Simple SOFR
Daily Simple SOFR is calculated using simple interest over the current interest period. For Daily Simple SOFR, the overnight SOFR rate is sourced daily and multiplied by the outstanding principal of the loan.
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NY Fed SOFR
For a given accrual period (commonly 30 days), the NY Fed SOFR rate takes a compounded average of the prior accrual period, such that the rate is known at the beginning of an interest period.
What Are the Current Rates for SOFR, Average SOFR, and Term SOFR?
The SOFR rate is reported daily at 8:00 a.m. ET by the Federal Reserve Bank of New York. The daily published rate represents the rates on overnight repurchase transactions initiated the previous business day and are to be repaid on the current business day. Below are the current SOFR, 30-Day Average SOFR, and 30-Day Term SOFR rates as of September 9th.
Current SOFR Rate
30-Day Average SOFR Rate
30-Day Term SOFR Rate
How Can Thirty Capital Financial Help?
Thirty Capital Financial offers consultations to help you successfully navigate the transition to SOFR. With over 45 years of collective interest rate hedging/derivatives expertise, our team is here to help you explore SOFR solutions.
We help borrowers by talking with their lender and identifying what the best SOFR rate is for each borrower’s unique situation. Additionally, we help borrowers implement strategies to hedge against increases in SOFR, such as interest rate caps, collars, floored swaps, swaps, swaptions, and cancellable swaps.
Our consultants work hard to ensure a smooth transition to SOFR and help you get the most beneficial deal to maintain the lowest costs possible.
Get in touch with one of our experts to help you calculate SOFR rates today!
