Types of Interest Rates cont'd #primers

For decades, the global standard of the price of money was LIBOR. LIBOR (London Inter-Bank Offered Rate) was an unsecured global rate set by a committee of different global financial institutions that would quote what they believed to be the fair price of short term funding debt which would then be averaged out. The SOFR (Secured Overnight Financing Rate) was chosen to be the successor on the global price of short term cash.

The global price of money is now being priced based upon the quantity of available collateral in the global markets — US Treasuries. The biggest driver of supply of US Treasury is the Fed in its open market operations. This means they have a much more explicit grasp on the overnight rate than they did with EFFR.

Concoda summarized the transition from LIBOR onto SOFR, as well as its challenges, in this post.

#primers