By: D. Heath, Editor, Chief Meme Investigator
Every day meme economists manage to unveil a new scary chart. I don't how they continue to find them. There must be a scary chart search engine out there. Scary chart you ask? You exactly know what I'm talking about! The beginning years of the chart are flat and uneventful, and then further along the chart a mysterious later date marks the initiation of hyperbolic growth or decline. Suddenly the values have exploded upward or downward, and meme economists tell you that this intense movement means something, something BIG. Today, there are viral images of SOFR Volume or Secured Overnight Financing Rate Volume spreading across social media. It works because few people outside of economics or finance have exposure to this financial indicator. So when viral images are being spread across social media of this supposed SOFR Volume it is easy to be menaced. The unfamiliarity of the subject, coupled with the drama of the chart adds to the fear. The meme economists never unveil and explain boring charts, just the charts with extreme ratios. Let's dive into whether the SOFR Volume is showing that you should dive out the economy.
What is the SOFR Volume?
SOFR and SOFR volume are the heartbeats of the overnight lending market. SOFR tells you the interest rate for borrowing overnight using Treasury securities as collateral. SOFR volume tells you how active the market is by revealing the total amount of borrowing activity or transactions that happens using SOFR-based loans or instruments, typically in the overnight lending market.
To damper the hysteria, I'm would like to offer a short yet non-dramatic story to explain SOFR Volume.
A Day in the Life of an Overnight Trader
It’s just past 7 p.m. and I’m sitting at my desk in the trading floor of a large investment bank, a place where the lights are always on and the buzz never really stops. I’m an overnight trader, which means I handle the part of the market where institutions borrow and lend money overnight. My job revolves around SOFR—Secured Overnight Financing Rate—and its volume.
I take a deep breath. Another busy night ahead. The U.S. Treasury market is still buzzing after hours. My job? To keep an eye on the overnight repo market, where SOFR is determined, and make sure our bank can get the liquidity it needs while paying the right rate.
The Opening Move
I open my screens to see the latest data. I’m scanning multiple charts, but one stands out: SOFR volume.
SOFR, remember, is the interest rate that banks use to borrow cash overnight with Treasury securities as collateral. But what I’m really focused on is SOFR volume, the total amount of borrowing happening in the market. This tells me how active the market is.
Tonight, the volume is pretty strong—about $800 billion. That’s good news for me. High volume means the market is deep with liquidity. Lots of lending and borrowing are happening, and the rate should remain stable. The more transactions, the less risk of any single institution moving the rate dramatically.
But I’ve seen nights where that volume drops down to $200 billion. Those are the nights I don’t sleep well. If the volume’s low, it means there’s less borrowing going on, and that makes liquidity tighter. In other words, it becomes harder to get loans at the usual rate. And if I can’t get a loan at a reasonable rate, it could cost my bank a lot more money.
The Borrowing Game
I take a call from my counterpart at another bank. It’s 7:30 p.m. now. He’s asking if I need to borrow overnight, and I tell him I’ll need a couple hundred million. The rate I’ll pay is tied to SOFR, and we both know the current SOFR rate will reflect the volume of transactions in the market. If the volume stays high, I’m looking at a relatively low rate. If it drops, I might have to pay a little more.
"How’s the volume looking tonight?" I ask him casually.
“Solid," he replies. "Looks like we’re hitting around $800 billion. Shouldn’t be any issues.”
That’s a relief. At least for tonight, we’re in a good position. I’m in the clear for now.
Watching the Clock
It’s now 10 p.m. and I’m tracking every movement in the overnight market. The minute-to-minute fluctuations in SOFR volume are key. I’m watching the market like a hawk, making sure the rate is staying in line with expectations. If the volume drops suddenly—say, under $500 billion—I know I’ll have to adjust quickly.
At 11:30 p.m., something catches my eye. SOFR volume just dropped by about $50 billion in the last 30 minutes. It’s a slight dip, but it’s enough to signal a tightening of liquidity. I make a mental note to adjust our borrowing strategy just in case we need to pay a bit more to lock in funds for the night.
The Midnight Check-In
It’s now midnight, and the SOFR volume is holding steady at $780 billion. The borrowing rate remains fairly low, and it seems like liquidity is still healthy. It’s been a relatively calm night—nothing too out of the ordinary. But I know this can change quickly. We’re about 7 hours into this 24-hour trading cycle, and there’s always the chance that something unexpected could cause volume to dip.
I log into a meeting with senior traders to discuss our strategy for the next day. There’s chatter about SOFR again. The markets have been a bit unpredictable lately. The volume had been hovering around $600 billion over the past few days, which was lower than usual. That drop in volume could signal more cautious behavior in the financial system, especially if uncertainty creeps in—like a potential rate hike or some market shock. It’s our job to stay ahead of these shifts, and the volume helps us predict what's coming next.
The Endgame
By 3 a.m., the volume seems to have stabilized. It hasn’t dipped below $750 billion, and the SOFR rate remains predictable. At this point, I’m breathing a little easier. I’ve locked in my overnight borrowing at a good rate and even managed to secure some extra liquidity for the day ahead. The market’s calm, the volume is solid, and I can rest easy knowing the system’s in good shape.
But tomorrow, I’ll be back at it, watching the volume closely. Every day brings new dynamics, new risks. The volume of SOFR transactions—whether it’s rising or falling—tells me what’s really going on beneath the surface of the financial markets. It’s my job to read that volume and use it to make smart decisions for my bank.
Reflection
As I finally pack up for the night, I think about the role SOFR volume plays in everything. It’s more than just a number—it’s the lifeblood of overnight lending. It tells me how much trust there is in the system, how easy or hard it will be to get money, and how much risk the market is willing to take on.
In this world, where millions, sometimes billions, are borrowed and lent overnight, SOFR volume is like a pulse. If it’s healthy, everything’s running smoothly. If it drops too low, it’s a signal that something’s off, and we need to react fast.
I close my computer, grab my coat, and head out the door. Tomorrow, I’ll do it all over again. But for tonight, the market’s calm—and I’ve done my part.
Seems like a pretty uneventful day for the overnight day-trader, almost if there is minimal drama associated with the SOFR Volume. But now things are different according to the meme economists, the SOFR Volume was at $3.41 trillion. Maybe there is drama, maybe the overnight trader should alert his team that the economy is destined to melt down tomorrow.
Let's get back to that trader:
It’s just after lunch, and I’m back at my desk.
The day’s been moving fast—one minute I’m reviewing the latest Treasury auction results, the next, I’m tracking the daily SOFR volume. But today… something’s off.
I see it. $3.41 trillion.
What the hell?
Normally, I’d be seeing numbers in the $1.2 to $1.5 trillion range—anything higher than that feels like a big day, and we start paying closer attention. But this? This is way beyond typical market movement. $3.41 trillion is huge. It’s a surge. Something’s going on.
I check my screen again to make sure I’m reading this correctly, and I get the same number. My heart rate kicks up a notch. I immediately pull up my liquidity charts and check the broader financial news to see if I’ve missed anything major. I don’t want to be caught off guard.
What does this mean for me?
First things first: I’ve got to know why the volume is so high. If this is a policy-driven event, like the Fed stepping in to inject liquidity or something related to a massive Treasury bond auction, it could just be a blip. The market responds to those events. But if this spike is happening without a clear catalyst, I know that something deeper could be brewing.
I glance over at my desk partner. "You seeing this?" I ask him, and point at the number on my screen. He stares at it for a moment, his eyebrows knitting together.
“Yeah, that’s not normal. We should be on high alert.”
I agree and I am. I’m really concerned about liquidity right now.
When you’re looking at SOFR volume, you're really looking at market liquidity. High volume usually means there’s a lot of borrowing and lending at SOFR rates, and things are running pretty smoothly. But today? The volume spike is giving me a gut feeling that things could be tighter than usual.
What I don’t want to see is that, even with all this volume, the SOFR rate starts rising too quickly. If it spikes, it could mean that banks are scrambling for liquidity, and there's not enough to go around. That’s when you get into trouble. It could be a signal that too many institutions will soon by fighting over a limited supply of overnight funds.
Right now, though, the rate is still holding steady. That’s good. But the higher the volume, the more likely the rates could start to move if liquidity thins out too quickly.
Is it just me, or is this volume a red flag?
I think back to a few years ago when we saw big spikes like this during the market upheavals. If this volume is truly out of the ordinary, it could indicate a liquidity squeeze coming down the road. A lot of borrowing means a lot of financial institutions are on edge, and that’s not something to take lightly.
I’m running through different scenarios in my head. Could this be related to a massive surge in collateral being used in repos? If so, then the system’s using up a lot of the safe collateral—like U.S. Treasury securities—and it might not be as easy to borrow at these rates tomorrow.
I make a quick decision to pull in some extra liquidity just in case. I don't want to wait for the market to show signs of strain before I act.
But should I panic?
Look, $3.41 trillion is certainly an outlier. But volume alone doesn’t tell the whole story. If rates stay stable, this could just be a one-off event where the market is, for whatever reason, a bit more active than usual.
However, if this volume is driven by uncertainty or a policy move—and it comes with rising SOFR rates—that’s when I’ll really start to worry. If liquidity starts tightening, I need to be prepared to get into the market early to lock in some funding, or the borrowing costs might jump.
So, for now, I stay vigilant.
I keep watching the volume and the rate. If the volume keeps rising or if the rate starts creeping up faster than expected, I’ll know it’s time to reassess. This spike is unusual, but I’ve seen things like this before. The key is to keep your head cool, understand the context, and stay ahead of the market.
For now, I’ll stay glued to my screens. At the end of the day, the market will show its hand, but I need to be ready. One thing's for sure—there's something bigger going on beneath the surface.
Nice to see that our overnight trader is not in panic mode, but is on alert. The trader's alertness will help this trader gather and process important data, without being menaced and panicked into regrettable financial decisions.
Want to see the drama for yourself? Check it out here: https://fred.stlouisfed.org/series/SOFRVOL#
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