SOFR rose to 3.95%, above the Fed’s 3.90% reserve rate, as bank reserves fell $134 billion

SOFR, the overnight repo rate that many floating-rate real estate loans are priced from, closed at 3.95% on November 2 ^[1]. That puts it five basis points above the 3.90% interest rate on reserve balances and five below the Fed’s 4.0% standing repo rate ^[4].

The rate jumped from 3.62% to 3.85% when the Fed’s September increase took effect on September 17 ^[1]. It then held between 3.87% and 3.90% until October 21 and has risen most days since ^[1].

Reserves fell as Treasury’s cash account grew

The fed funds rate printed 3.88% on every business day from October 1 to November 2 ^[3]. The move in SOFR lines up with a drop in bank reserves, which fell $134 billion between October 7 and October 28, by our math from the Fed’s weekly balance sheet ^[5][6].

Over the same three weeks, Treasury’s general account at the Fed grew by $135 billion to $1.016 trillion ^[5][6]. Cash in that account is not available to banks as reserves.

The Fed’s October directive tells the trading desk to buy Treasury bills “when appropriate” to keep reserves ample ^[4].

Loan resets lag the overnight rate

Many construction and bridge loans use a 30-day or 90-day SOFR average instead of the daily rate. On November 2 those averages were 3.905% and 3.785%, and the 180-day average was 3.723% ^[2].

How to use this

For construction and bridge-loan borrowers

1. Find the exact index in your note: daily SOFR, a 30-day average, a 90-day average or Term SOFR. The gap between the 90-day average and the overnight rate was 0.165 points on November 2 ^[1][2], and we calculate that closing it would add about $4,950 a year on a $3 million drawn balance.
2. Rebuild your interest reserve with the current index plus your margin. At the 30-day average of 3.905% plus a 3.50-point margin, we calculate interest of about $222,000 a year on $3 million drawn ^[2].
3. Ask your lender whether the loan has a rate floor and where it sits. The Fed’s October loan officer survey found banks tightened their use of interest rate floors on loans to small firms ^[8].

For lenders and investors in floating-rate debt

1. Check how much room your borrowers’ rate caps have left. SOFR has risen about 0.33 points since September 11 ^[1], and a cap bought before the September hike could be closer to its strike than the model assumes.
2. Watch reserves and Treasury’s cash balance each Thursday. Reserves fell to $2.895 trillion on October 28 ^[5], and further declines could keep SOFR pressed toward the 4.0% standing repo rate ^[4].
3. Compare SOFR with the fed funds rate in your monthly portfolio report. SOFR ran seven basis points above the 3.88% fed funds rate on November 2 ^[1][3], and a gap that keeps widening would point to tighter funding in the repo market rather than a change in Fed policy.