Interest Rates Shouldn’t Be Interesting

What if your mortgage was indexed to SOFR? I mean, it isn’t, so don’t worry about it. But in theory the Federal Reserve’s Secured Overnight Financing Rate is soon supposed to become the most important interest rate for U.S. dollars, the new reference rate for trillions of dollars of derivatives and floating-rate loans of all sorts, and so one day lots of corporate loans and adjustable-rate mortgages might be indexed to it.

SOFR is a repo rate: It’s a daily index of the interest rate that banks and hedge funds pay to borrow money overnight, secured by Treasury securities. Repo markets have fallen apart a bit this week, as you might have heard. The Fed’s SOFR data shows some repo trades with interest rates as high as 9% yesterday, and SOFR itself—a volume-weighted index of a broad group of trades—settled at 5.25% yesterday. It was 2.43% on Monday, and had spent the previous month in a range of 2.09% to 2.21%. That’s a normal range, consistent with other short-term interest rates. (The Fed Funds rate is 2.25%, one-month Libor is about 2.04%, one-month Treasury bill rates are about 1.96%, etc.) In the entire (brief) history of SOFR, it had gotten above 3% once, clearing at 3.15% on Jan. 2, 2019. A rate of 5.25% is, in some real but hard-to-define sense, definitely the “wrong” interest rate. It was, however, the SOFR rate yesterday.