Guide

SOFR explained

Harbor Capital held $180M of floating-rate notes indexed to three-month LIBOR when the ARRC sunset clock hit June 2023. Two legacy corporates still printed “LIBOR + 225 bp” in prospectuses but had fallback language switching coupons to Term SOFR + spread adjustment once LIBOR ceased. The desk repriced the sleeve: rolled $120M into new issues at SOFR + 210 bp (10 bp tighter spread reflecting lower basis risk), hedged $40M of residual LIBOR exposure with SOFR-OIS swaps through 2027, and parked $20M in overnight reverse repo while waiting for primary issuance. Blended carry rose 18 bp annualized versus the old LIBOR stack, with daily marks tied to a benchmark the whole market could observe in real time. That migration only works if you understand what SOFR — the Secured Overnight Financing Rate — actually measures, and why it is not interchangeable with the federal funds rate or legacy LIBOR.

SOFR is the volume-weighted median rate on overnight Treasury repo transactions — cash lent against U.S. government collateral. It replaced USD LIBOR as the recommended risk-free reference rate after manipulation scandals and thin underlying markets made LIBOR untenable. Unlike unsecured interbank lending benchmarks, SOFR is secured, transaction-based, and published every U.S. business morning by the Federal Reserve Bank of New York. This guide covers overnight SOFR calculation, secured vs unsecured spread dynamics, Term SOFR and CME futures, swap curves and floating-rate note conventions, the Harbor Capital FRN refactor, a technique decision table against fed funds and T-bills, pitfalls, and a production checklist alongside duration and money-market analytics.

What SOFR measures

SOFR aggregates three overnight repo market segments reported to the New York Fed:

Tri-party general collateral (GC) repo — cleared through BNY Mellon; the deepest, most representative segment.
General collateral finance (GCF) repo — FICC-cleared dealer-to-dealer trades on U.S. Treasury and agency collateral.
Bilateral Treasury repo — delivery-versus-payment (DVP) trades between dealers and buyside firms, excluding Fed ON RRP and SRF.

The published rate is the volume-weighted median transaction rate across eligible trades between 7:00 a.m. and 1:15 p.m. Eastern, excluding the top and bottom quartiles of volume. Because it is a median of actual trades — not a survey or estimate — SOFR reflects where cash actually cleared against Treasury collateral that morning. Typical daily volume exceeds $2 trillion, making it far harder to manipulate than panel-based LIBOR ever was.

SOFR is overnight only. There is no native three-month SOFR “fixing” like LIBOR 3M. For term products, markets use Term SOFR (forward-looking compounded averages) or compounded SOFR in arrears (backward-looking, the ARRC-recommended convention for new floating-rate notes).

Secured vs unsecured: why SOFR differs from fed funds and LIBOR

Three benchmarks often get conflated; they measure different things:

Benchmark	Collateral	Typical spread vs SOFR
SOFR	Treasury repo (secured)	Baseline
Effective federal funds rate (EFFR)	Unsecured interbank	SOFR often trades a few bp below EFFR in calm markets
Legacy LIBOR (3M)	Unsecured panel estimate	LIBOR included bank credit premium; typically above SOFR

In stress episodes the ordering can invert: when Treasury collateral is scarce (March 2020, September 2019), special repo rates plunge and SOFR can print unusually low or even negative on a volume-weighted basis, while unsecured funding tightens. That is why ARRC fallback language added a spread adjustment (often 26.161 bp for 3M LIBOR to Term SOFR) to compensate for the structural difference between unsecured LIBOR and secured SOFR.

For discounting and option pricing, many desks use SOFR-OIS curves (overnight indexed swaps) as the USD risk-free curve, replacing LIBOR-OIS after the transition. The OIS leg compounds daily SOFR; the fixed leg sets par swap rates at standard tenors (1Y through 30Y).

Term SOFR, compounding, and floating-rate conventions

Compounded SOFR in arrears (recommended for FRNs)

New U.S. dollar floating-rate notes typically set coupons as Compounded SOFR + spread, observed over each interest period with a two-business-day lookback. The rate is not known until the period ends — unlike LIBOR, which fixed at the start. Treasury operations teams must model accrual paths, not single fixings.

Term SOFR (forward-looking)

CME publishes Term SOFR reference rates (1-month, 3-month, 6-month, 12-month) derived from SOFR futures and swap markets. Term SOFR is forward-looking — you know the reference rate at the start of the period, similar to LIBOR ergonomics. It is widely used in loans and legacy fallback language, though the ARRC prefers compounded in arrears for new FRN issuance to minimize basis risk with the underlying overnight market.

SOFR futures and the swap curve

CME SOFR futures (one-month and three-month contracts) trade over a million contracts daily, anchoring the short end of the curve. SOFR swap markets build the term structure for hedging FRN portfolios and pricing callable agency debt. When the Fed shifts the target range, front-month SOFR futures reprice within minutes; back-end swaps move with terminal rate expectations and term premium.

Harbor Capital FRN sleeve refactor

Harbor's fixed-income team ran three parallel workstreams during the LIBOR sunset:

Inventory scrub — tagged every legacy LIBOR-linked bond and loan with fallback trigger dates and spread-adjustment mechanics.
Reinvestment policy — new purchases only at Compounded SOFR + spread or Term SOFR + spread with documented basis-risk limits between the two conventions.
Hedge book — matched SOFR-OIS swaps to immunize duration on the fixed-rate tail while leaving FRN coupons floating with the benchmark they actually reference.

The $120M rollover into SOFR + 210 bp corporates saved 10 bp of spread versus legacy LIBOR paper at equivalent rating, partly because investors no longer demanded a manipulation-premium or panel-thinness discount. The $40M swap overlay cost 4 bp annually in roll and margin but removed basis mismatch between legacy LIBOR fallbacks and the fund's new SOFR-native holdings. Overnight cash in reverse repo earned within 2 bp of SOFR itself — confirming that for pure cash parking, government MMFs and ON RRP are effectively SOFR-linked vehicles.

Technique decision table

Benchmark / vehicle	Best when	Trade-off
Overnight SOFR (repo, ON RRP)	Same-day cash parking, treasury liquidity sleeves	Overnight only; no term rate lock without derivatives
Compounded SOFR FRNs	New floating-rate credit exposure aligned with ARRC best practice	Coupon unknown until period end; harder retail communication
Term SOFR loans/notes	Borrowers need fixing at period start (LIBOR-like workflow)	Basis risk vs compounded SOFR; not identical to overnight path
SOFR-OIS swaps	Hedge FRN duration, build custom fixed-float exposure	CSA margin, curve roll, counterparty risk
EFFR / fed funds	Measure unsecured interbank conditions, Fed corridor	Not collateralized; poor direct substitute for FRN coupons
T-bills	Default-free short government yield without derivative complexity	Fixed maturity; not a floating benchmark for credit spreads

Common pitfalls

Treating SOFR as LIBOR with a new label — secured overnight repo is structurally different; spread adjustments exist for a reason.
Mixing Term SOFR and compounded conventions — hedging compounded FRNs with Term SOFR swaps leaves basis risk that widens in volatility.
Ignoring lookback and observation shift — FRN accrual conventions (2-day lookback, lockout days) change effective coupons versus naive SOFR averages.
Using SOFR in stress as a cash-rate proxy only — special repo dynamics can distort overnight SOFR independently of Fed policy.
Stale curve for illiquid bonds — pricing legacy LIBOR fallbacks requires the correct trigger and spread table, not today's SOFR swap rate alone.
Confusing SOFR with SRF rate — the Fed's Standing Repo Facility is a ceiling facility, not the market-clearing SOFR print.
Discounting with the wrong curve — post-LIBOR, USD derivatives discount on OIS (SOFR), not separate LIBOR discount curves.
Retail products without daily accrual disclosure — compounded-in-arrears FRNs confuse investors expecting known coupons upfront.

Production checklist

Tag every holding with benchmark (SOFR compounded, Term SOFR, legacy LIBOR fallback).
Document spread adjustment and trigger language for pre-2023 FRNs and loans.
Build SOFR-OIS curve from vendor or exchange marks; reconcile to CME Term SOFR.
Model compounded accrual with correct lookback, observation shift, and lockout.
Hedge basis between Term and compounded exposures if both exist in book.
Monitor SOFR–EFFR spread and GC–special repo indicators for plumbing stress.
Align cash sleeves (repo, ON RRP, gMMF) with overnight SOFR for idle liquidity.
Update pricing and risk systems to OIS discounting; retire LIBOR curves.
Train client-facing teams on in-arrears coupon mechanics before selling FRN products.
Archive daily SOFR prints and trade volumes for audit and back-testing.

Key takeaways

SOFR is the volume-weighted median overnight Treasury repo rate — secured, transaction-based, and published daily by the New York Fed.
It replaced USD LIBOR but is not a drop-in substitute; spread adjustments compensate for secured vs unsecured differences.
New FRNs use compounded SOFR in arrears; Term SOFR provides forward-looking fixings for loans and legacy fallback language.
Harbor Capital saved 18 bp annualized migrating from LIBOR-linked notes to SOFR-native paper with matched OIS hedges.
SOFR-OIS curves are now the USD risk-free term structure for swaps, options, and discounting — not LIBOR.