OBFR and SOFR both measure what it costs to borrow cash overnight in U.S. dollars, but they track different markets. The Overnight Bank Funding Rate (OBFR) reflects unsecured borrowing between banks, where no collateral changes hands and the lender bears the risk of not being repaid. The Secured Overnight Financing Rate (SOFR) reflects borrowing collateralized by U.S. Treasury securities, which makes it a near risk-free rate. That single distinction drives everything else: how the two rates behave, what they’re used for, and why SOFR now sets the interest rate on trillions of dollars in loans, derivatives, and bonds while OBFR stays mostly in the background as a monetary policy gauge.
What OBFR Measures
OBFR captures the wholesale, unsecured cost for banks to borrow cash overnight. The Federal Reserve Bank of New York calculates it as a volume-weighted median of three transaction types: overnight federal funds trades between depository institutions, Eurodollar transactions (U.S. dollar deposits held at bank branches outside the country or at international banking facilities domestically), and certain domestic deposits reported on the FR 2420 Report of Selected Money Market Rates.1Federal Reserve Bank of New York. Overnight Bank Funding Rate
The daily transaction base is modest by money-market standards. In late March 2026, OBFR volumes ranged from roughly $189 billion to $214 billion per day.2FRED | St. Louis Fed. Overnight Bank Funding Volume (OBFRVOL) Because every transaction behind OBFR is unsecured, lenders face the risk that a borrower could fail to repay, and that counterparty credit risk gets priced into the rate. When confidence in the banking system is high, the premium is small. During financial stress, it widens as lenders demand more compensation for the added exposure.
What SOFR Measures
SOFR measures the cost of borrowing cash overnight against U.S. Treasury collateral. Each underlying transaction is a repurchase agreement, or “repo”: one party sells Treasuries to another and agrees to buy them back the next day at a slightly higher price. That price difference is the interest on the overnight loan.3Brookings Institution. What Is the Repo Market, and Why Does It Matter?
The New York Fed calculates SOFR as a volume-weighted median of three segments of the Treasury repo market: tri-party repo data from the Bank of New York Mellon, General Collateral Finance (GCF) repo data, and bilateral repo transactions cleared through the Fixed Income Clearing Corporation.4Federal Reserve Bank of New York. Secured Overnight Financing Rate Data Combined, these produce enormous volume. As of late March 2026, daily SOFR transaction volume exceeded $3 trillion, roughly 15 times the volume behind OBFR.5FRED | St. Louis Fed. Secured Overnight Financing Volume (SOFRVOL) That depth makes SOFR very difficult to manipulate, which was one of its key attractions as a LIBOR replacement.
Because every SOFR trade is backed by Treasury collateral, a lender can seize and sell those securities if the borrower defaults. That protection effectively strips credit risk out of the rate, which is why SOFR is described as a “near risk-free rate.”6Federal Reserve Bank of New York. How SOFR Works
Why the Secured vs. Unsecured Gap Matters
The spread between OBFR and SOFR is a real-time reading on how the market prices credit risk. OBFR carries a credit premium because unsecured lenders have no collateral to fall back on. SOFR removes that premium because Treasuries pledged as collateral protect the lender. In calm markets, the two rates sit very close together. A 2018 Federal Reserve memo noted that OBFR and the closely related Effective Federal Funds Rate (EFFR) have generally printed within one basis point of each other since OBFR’s launch in 2016, and both stay close to SOFR under normal conditions.7Federal Reserve Board. The Federal Reserve’s Target Interest Rate
Under stress, the picture shifts. When banks worry about one another’s solvency, unsecured rates climb relative to secured rates as lenders demand higher compensation for the risk of not getting paid back. A widening OBFR-SOFR gap is one of the clearest signals of banking-sector strain.
The volume difference reinforces the distinction. SOFR’s $3 trillion daily base dwarfs OBFR’s roughly $200 billion. Most overnight cash lending in the U.S. now flows through the secured repo market rather than the unsecured interbank market. Post-2008 regulations and bank capital requirements made unsecured lending more expensive, pushing activity toward collateralized channels.
Where Each Rate Actually Shows Up
OBFR: A Monetary Policy Gauge
The Federal Open Market Committee sets a target range for the federal funds rate and steers overnight rates using the interest rate paid on reserve balances and the offering rate on its overnight reverse repurchase agreement facility.8Federal Reserve. Economy at a Glance – Policy Rate OBFR and EFFR are the Fed’s primary gauges for whether that policy rate is actually reaching the banking system. Both track unsecured overnight borrowing and tend to move together, but OBFR draws from a broader pool because it incorporates Eurodollar deposits alongside federal funds trades. The Fed has noted that if Federal Home Loan Banks or other major participants redirected lending away from the federal funds market, EFFR volumes could drop sharply while OBFR would remain anchored by additional data sources.7Federal Reserve Board. The Federal Reserve’s Target Interest Rate
OBFR does not appear in loan documents. Its role ends at policy monitoring.
SOFR: The Rate on Your Loan
If you have a floating-rate loan or adjustable-rate mortgage, SOFR almost certainly sets your baseline interest rate. For residential ARMs, Freddie Mac and Fannie Mae require the 30-day Average SOFR as the index. Lenders add a margin on top, which for conforming ARMs must fall between 100 and 300 basis points.9Freddie Mac. SOFR ARMs Fact Sheet If the 30-day Average SOFR is 4.30 percent and your margin is 2.75 percent, your rate adjusts to 7.05 percent at the next reset, subject to any periodic or lifetime caps in your loan agreement.
In commercial lending, Term SOFR has become the standard reference for syndicated loan agreements. Since the beginning of 2022, the vast majority of new syndicated deals have priced off SOFR rather than LIBOR, with Term SOFR the most common variant. Collateralized loan obligation issuances have followed the same pattern. SOFR also became the dominant U.S. dollar interest rate benchmark after the final LIBOR panel settings ceased on June 30, 2023, following the Alternative Reference Rates Committee’s 2017 recommendation.10Federal Reserve Bank of New York. ARRC: SOFR Transition
Overnight SOFR, Term SOFR, and SOFR Averages
Overnight SOFR tells you what happened yesterday. For many financial products, borrowers and lenders need to know a rate at the start of an interest period, not at the end. Term SOFR is a set of forward-looking rates published daily by CME Group for one-month, three-month, six-month, and twelve-month tenors, derived from SOFR derivatives markets.11CME Group. CME Term SOFR Reference Rates Benchmark Methodology
The ARRC recommends Term SOFR for business loans, including syndicated and bilateral commercial credit facilities, and as a fallback for legacy LIBOR cash products. For derivatives, floating-rate notes, and consumer loans, the ARRC instead recommends overnight SOFR or SOFR averages because those forms are more robust and align better with the deep SOFR derivatives market.12Federal Reserve Bank of New York. ARRC Term SOFR Scope of Use Best Practice Recommendations
The tradeoff for borrowers is straightforward. Term SOFR fixes your interest payment at the start of each period, which simplifies budgeting. SOFR compounded in arrears reflects what actually happened to rates during the period, giving a more accurate hedge against interest rate risk but leaving the exact payment amount uncertain until the period ends.
Watch Out for Quarter-End SOFR Spikes
SOFR has one quirk worth knowing about. The rate can jump at quarter-end and, to a lesser extent, month-end dates because banks pull back from repo activity around regulatory reporting dates to improve their balance sheet ratios. That temporarily reduces the supply of cash in the repo market and pushes rates higher.
In the second half of 2024, the spread between SOFR and the ON RRP rate averaged about 4 basis points on normal days. At quarter-ends, that spread jumped to 24 or 25 basis points, and hit 28 basis points near year-end in December 2024. As the Federal Reserve has reduced the size of its balance sheet, these month-end and quarter-end spikes have become more pronounced.13Federal Reserve Board. What Happens on Quarter-Ends in the Repo Market
OBFR, drawing from a different market, doesn’t experience the same pattern. A SOFR-linked loan that happens to reset on a quarter-end date can lock in a temporarily elevated rate. Term SOFR and 30-day Average SOFR smooth out much of this volatility, which is one reason those forms are preferred over single-day SOFR readings for most lending applications.
Side-by-Side Comparison
- Collateral: OBFR is unsecured; SOFR is secured by U.S. Treasury securities.
- Credit risk: OBFR carries a credit risk premium; SOFR is near risk-free.
- Daily volume: OBFR draws from roughly $200 billion per day; SOFR exceeds $3 trillion.
- Data sources: OBFR uses federal funds, Eurodollar, and domestic deposit transactions; SOFR uses tri-party, GCF, and bilateral Treasury repo transactions.
- Primary role: OBFR helps the Fed monitor how policy rates transmit through banks; SOFR benchmarks loans, derivatives, and bonds globally.
- Volatility pattern: SOFR can spike at quarter-ends due to bank balance sheet management; OBFR is more stable around those dates.
- Typical level: SOFR typically prints at or slightly below OBFR because secured lending carries less risk, though both sit within the Fed’s policy corridor.