SOFR Worries

Macro
Spikes in SOFR may signal trouble ahead
Author

Mike Aguilar

Published

October 27, 2025

What’s Happening

SOFR > Fed Funds signals trouble. Witness the issues before and during COVID

After a period of calm, it’s rising again

Background

EFFR( Effective Fed Funds Rate): Banks lending overnight, unsecured to meet reserve requirements

SOFR (Secured Overnight Fund Rate): A large array of financing institutions lending overnight, secured (typically) by Treasuries in a repo market

Repo (Repurchase Agreement): Today, A gives B cash in exchange for Treasury collateral. Tomorrow, B gives A cash plus interest and A returns collateral

SOFR usually/theoretically less than EFFR since it’s a secured rate

Why SOFR Fed Funds Spread Rising?

A couple of possibilities

  1. More Demand: Treasury has increase short term bill issuance. Investors are demanding more cash (via repos) to make these purchases
  2. Less Supply: Treasuries roll off Fed balance sheet under QT. Treasury pays Fed, which lowers bank reserves and cash for lending.

More nefarious reasons

  • Higher demand due to MMF, etc… running to safety and need cash
  • Less Supply due to lenders don’t want to accept Treasury as collateral, as currently priced

Implication

  • Standing Repo Facility seems to be preventing rates from blowing out
  • J Powell hinting at ending of QT, which should alleviate some pressure