The promises and pitfalls of the secured overnight financing rate

The Secured Overnight Financing Rate (SOFR) significantly diverges from Treasury Bill rate when the financial market is under stress. We document that this divergence is significantly manifested in the basis swaps market and that the SOFR’s abrupt downward deviations are associated with increases in the VIX index. Hence, we doubt whether the SOFR is resilient enough as a reference rate for fixed-income instruments when the financial market is in a state of turmoil.