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Interest rates on secured and unsecured overnight lending

Comparing AMERIBOR and SOFR

The FRED Blog has discussed interest rates before, including those used as benchmarks of overnight borrowing costs in financial markets. Today, we revisit the topic of overnight financial transactions by comparing the interest rates of two types of loans: secured and unsecured.

The FRED graph above shows two different interest rates paid by financial institutions for borrowing cash at the end of the business day and paying it back at the start of the next business day:

  • The blue line shows the overnight unsecured AMERIBOR benchmark interest rate. Reported by the American Financial Exchange, this is a volume-weighted average of interest rates applied to transactions where the borrower does not offer a security as collateral for repayment.
  • The red line shows the secured overnight financing rate (SOFR). Reported by the Federal Reserve Bank of New York, this is a volume-weighted median of interest rates applied to transactions where the borrower offers Treasury securities as collateral for repayment.

If you look closely on any given date (we suggest zooming in by clicking and dragging on the graph itself), you will notice that the interest rates are very similar. Despite the fact that overnight loans are paid back very quickly, in less than 24 hours, secured transactions generally record lower interest rates than unsecured transactions: The collateral offered in secured borrowing reduces the amount of potential losses associated with lending, making it cheaper for both lender and borrower.

However, there are days—or even weeks—when unsecured borrowing is cheaper than secured borrowing. You can see here a FRED graph showing the difference between the AMERIBOR and SOFR interest rates. The largest spike of the SOFR series, on September 17, 2019, provides an example. On that date, as described by Sriya Anbil, Alyssa Anderson, and Zeynep Senyuz, a momentaneous shortage in liquidity resulted in a momentous increase in secured borrowing costs and a minimal increase in unsecured borrowing costs. The New York Fed quickly intervened to address this acute need for liquidity, and interest rates promptly returned to their pre-shortage levels.

How this graph was created: Search for and select “Overnight Unsecured AMERIBOR Benchmark Interest Rate.” From the “Edit Graph” panel, use the “Add Line” tab to search for and select “Secured Overnight Financing Rate.”

Suggested by Diego Mendez-Carbajo.

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