SOFR & The Next Great Depression Pt. 2

SOFR or the Secured Overnight Financing Rate is a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the London interbank offered rate (LIBOR). Interest rate swaps on more than $80 trillion in national debt switched to the SOFR in October 2020. This transition is expected to increase long-term liquidity but also result in substantial short-term trading volatility in derivatives. All that jargon aside SOFR is set to replace LIBOR as the benchmark banks use when setting interest rates. SOFR is unique because it is the only interest rate that affects you (the borrower) directly as well as indirectly. Understanding the Secured Overnight Financing Rate (SOFR) The secured overnight financing rate, or SOFR, is an influential interest rate that banks use to price U.S. dollar-denominated derivatives and loans. The daily secured overnight financing rate (SOFR) is based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets. Benchmark rates such as the SOFR are essential in the trading of derivatives—particularly interest-rate swaps, which corporations and other parties use to manage interest-rate risk and to speculate on changes in borrowing costs. Interest-rate swaps are agreements in which the parties exchange fixed-rate interest payments for floating-rate interest payments. In a “vanilla” swap, one party agrees to pay a fixed interest rate, and, in exchange, the receiving party agrees to pay a floating interest rate based on the SOFR—the rate may be higher or lower than SOFR, based on the party’s credit rating and interest-rate conditions. In this case, the payer benefits when interest rates go up, because the value of the incoming SOFR-based payments is now higher, even though the cost of the fixed-rate payments to the counterparty remains the same. The inverse occurs when rates go down. At the surface level, switching from LIBOR to SOFR is a great idea because it gives us access to even lower interest rates due to it being a secured rate. But as mentioned in this episode, there is a giant flaw with the SOFR rate being connected to the US Repo Rate and due to this the Feds have potentially opened us all up to the mother of all depressions. M1 & Other Investing Resources https://m1.finance/TjGme7YgPH-b https://act.webull.com/pm/AfSdHcj7oap... https://www.thecalculatorsite.com/fin... https://www.franklintempleton.com/fin... What I Use for Budgeting: https://www.personalcapital.com/ https://www.truebill.com/ http://refer.amex.us/WESLECF6jM?xl=cp15 If you want help setting up a portfolio service, a budget, or just want recommendations on what to do in a certain situation; feel free to comment or message me using one of the links bellow! @InvestwithWesley (FB) @InvestwithWesley (IG) DISCLAIMER: Although I am a Registered Investment Advisor, no statements made during this video should be taken as advice or recommendations since I do not know your specific situation, goals, or the suitability of said investments within your portfolio.