A benchmark reference rate designated as the preferred London interbank offered rate alternative in the U.S. has more than doubled in recent days, amid new questions over liquidity in its underlying markets.
On Sept. 17, the Secured Overnight Financing Rate, or SOFR, was at 5.25%, according to the Federal Reserve Bank of New York. That represented the highest daily mark since the regulatory body began publishing SOFR values in April 2018. SOFR was at 2.43% the day before its spike and at 2.20% on Sept. 13.
The surge comes as the New York Fed tries to address concerns about illiquidity in the short-term funding markets that underscore SOFR.
The regulator has been temporarily injecting billions of dollars into those markets in recent days as it attempts to counteract the effects from a decline in reserves, which has indicated to some economists that the amount of cash in the banking system is too limited. On Sept. 17, the New York Fed conducted $53.15 billion in repurchase agreement, or repo, transactions. The next day, it announced that it would conduct another series of repo purchases for up to an aggregate amount of $75 billion.
SOFR has fluctuated lately given the lack of liquidity within the repo markets. The rate is based on a mix of overnight U.S. Treasury repo transactions. SOFR, which U.S. regulators have said is their preferred alternative for companies to use once the Libor is phased out at year-end 2021, measures the cost to borrow cash.
The Fed's return to the short-term funding markets came in a push to maintain the federal funds rate within its target range of 2% to 2.25%. The benchmark fed funds rate jumped to 2.25% from 2.14% on Sept. 16. It continued to rise the next day, reaching 2.30% Sept. 17, according to the New York Fed.
