I will try to balance the "breaking news" by making this post more educational, explaining why this is happening and why I think the reasons are more prosaic than the fast news suggest.
First, let's define the relevant rates in question:
🔵EFFR (Effective Fed Funds Rate) is the rate at which banks lend money overnight to each other without any collateral.
🔴SOFR (Secured Overnight Financing Rate) is used by many more institutions (not just banks). The loans are made against collateral (typically Treasury bonds). This distinction will become important later.
Because EFFR is unsecured, it is expected to be slightly above SOFR due to a small credit risk premium. This is a textbook knowledge and has indeed been empirically confirmed (2021-2024).
However, in the second half of 2025, SOFR started being jumpy and rose above the EFFR. This stirred the Fed's reaction (fig. 2) and the aforementioned news.
💡Why is SOFR jumpy now?
During quantitative easing, the FED supplied market with plenty of liquidity by buying bonds from the Treasury Department and other participants. Once there is a lender (e.g. the FED), finding borrowers (Treasury and others) is rarely a problem. The result of this dynamics is a smooth, uneventful EFFR-SOFR spread.
However, everyone who has ever borrowed money knows that it is much harder to quickly find another lender to step in, when the original one demands to be paid back. After years of quantitative easing, FED started a period of quantitative tightening. Cash is being drained from the system and flooded instead with treasury bonds.
In other words, there is a scarcity of cash but plenty of collateral. More Treasuries on the market also mean more demand for repo financing (e.g. hedge funds buying bonds and selling bond futures, therefore funding bond purchases by borrowing at SOFR).
💡Why is EFFR not affected?
Remember what we said previously - the FED Funds rate is unsecured and therefore is not affected by the aforementioned repo market dynamics.
💡What is the significance of all of this?
The important thing is the quantitative easing or tightening itself, because it profoundly affects money supply, inflation, employment and long-term economic prospects. The daily noise in the repo market is just a natural second-order effect of reducing FED balance sheet. In grand scale of things, those wobbles don't mean much if managed properly.
The central bank is aiming to smooth this by applying temporary open-market ops, for the first time since mid-2020. This fact alone may indeed sound intriguing. However, in the 2010s, such operations were occuring more frequently (fig. 4).
