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Dear Fellow Traveler: Next Wednesday, the Federal Reserve meets. (The sound of a small child: “Yay!”) When they do, headlines will tell you they didn’t cut interest rates again. CNBC will cover it all day. Twitter’s bots will spell Jerome Powell wrong. And none of it will matter. Because the federal funds rate doesn’t matter as much as people think... We’re looking at the wrong thing… The Secured Overnight Financing Rate… (SOFR) underpins more than $200 trillion in financial contracts and is increasingly used in adjustable-rate loans, derivatives, and corporate borrowing. And people focus on the Fed Funds rate… which does little in comparison. What Is SOFR and Why Should You Care?SOFR is a broad measure of the cost of borrowing cash overnight in the Treasury repo market, where Treasury securities are used as collateral. The New York Fed publishes it every morning based on more than $2 trillion in daily transactions.
The federal funds rate, by contrast, is based on roughly $80 to $120 billion in unsecured lending between banks each day. That is a comical fraction of what SOFR covers. What’s worse, a huge share of federal funds lending is not even banks lending to banks anymore. The Federal Home Loan Banks are lending to foreign bank branches running an arbitrage trade against interest on reserve balances.
The “interbank market” the Fed targets increasingly consists of a government-backed housing lender financing carry trades for overseas banks. And if that sounds weird, it’s because it is. And not “haha weird.” But call your therapist for more details… “weird…” We keep acting like the Fed Funds rate is the most important thing in the world every six weeks… and it’s not. SOFR reflects the core funding markets of the financial system. It’s become the benchmark increasingly used in adjustable-rate mortgages. It’s written into derivatives contracts, corporate bonds, and floating debt. When we phased out LIBOR in 2023, SOFR replaced it for most US-dollar contracts. And unlike LIBOR, which was based on unsecured bank lending, SOFR is fully collateralized by US Treasuries. So, this reflects the ongoing demand for the safest collateral in the financial system (you know, the “safe” asset that's nearly keeps sinking the whole global economy). Today, SOFR anchors everything from interest rate swaps to corporate loans to floating-rate debt. It’s the core benchmark of the global derivatives market. But SOFR does something even more important. It closely tracks the cost of leverage in repo markets. Yeah… we might need some Mellow Corn for this one…
The Fed Warned Us About Repo Last FallLast October 2025, Dallas Fed President Lorie Logan gave a speech that should have been front-page news. She said that the Fed may eventually move toward a secured-funding benchmark. Her preferred candidate was something called TGCR, the tri-party general collateral rate. Because we needed more acronyms to keep track of each day… But TGCR tracks over $1 trillion in daily “risk-free” transactions and sits right alongside SOFR. Her argument was that the federal funds market has shrunk to the point where it no longer reflects the cost of borrowing in the US economy. The center of gravity in American money markets has moved to the repo market. SOFR and its cousins now represent where real money changes hands post 2023... Logan even showed that the Fed’s existing tools effectively control TGCR. Out of roughly 1,800 trading days in her sample, TGCR fell within the Fed’s target the overwhelming majority of the time. Now… here’s what matters… The Fed is already steering the repo market, but it hasn’t officially admitted it yet. The Fed does not directly set SOFR. Instead, it traps the repo market inside a corridor using interest paid on reserves, the reverse repo facility, and the standing repo facility. Here’s the fun of it all… They’re just not telling the market this on a daily basis. But it’s clear as day… The Fed steers the repo market even while it still pretends the federal funds rate is the main target. Which means next Wednesday is just one giant bullshit session for the cameras, so a bunch of journalists can sit in a room near power… And Powell can wear a tie… It’s complete theater… and it’s insane that this isn’t a bigger deal… Do you see why I treat this financial system with the respect it deserves? (None.) Imagine if you went to a restaurant that lists burgers on the menu but has been serving only sushi for five years, nobody has updated the sign, and they keep telling you, while you fumble those chopsticks: “Eat your burger… EAT IT!” It’s just a matter of time before they finally admit this… Won’t be next week though… The Hidden Engine: Repo and LeverageNow… some more fun… SOFR isn’t just a benchmark for loans. It’s the price of leverage inside the financial system. Every day, hedge funds, banks, and trading desks borrow money overnight in the repo market using Treasury securities as collateral. They borrow billions at a time to finance positions in bonds, futures, equities, swaps, and derivatives. The cost of that overnight borrowing is tied directly to SOFR. If SOFR rises, the cost of all that leverage rises. And leverage is everywhere (it’s right behind you…)
Hedge funds use repos to finance massive positions in US Treasuries through a strategy called the basis trade. In the basis trade… they buy Treasury bonds, sell Treasury futures against them, and borrow the cash needed to hold the bonds overnight through the repo market. That trade ranges from $1 trillion to $2 trillion, according to BIS data. And it’s largely necessary for the Treasury Department because it creates demand for U.S. debt… so they tend to look away and react when the leveraged funds buy into the tilt. The thing is… that trade only works if borrowing costs stay low and stable. Because Treasuries are the collateral used throughout the repo system, instability in repo funding quickly becomes instability in the Treasury market. And if SOFR jumps… the economics of the trade change instantly. Funding costs rise, and margins tighten. Then, we see sizable positions get unwound. This is why sudden spikes in repo rates have historically triggered some of the most violent market moves in modern finance, especially in the last seven years. For example, in March 2020, that happened. Hedge funds running massive Treasury basis trades suddenly lost repo funding as markets panicked. Positions unwound so quickly that even the US Treasury market, the deepest and supposedly safest market in the world, seized up. The Federal Reserve stepped in with trillions in liquidity to stop the plumbing of the financial system from breaking. But don’t worry… it wasn’t a “bailout.” Just a reminder that nothing is risk-free… Now, here’s another thing I need you to know… The SOFR is an overnight rate. The entire financial system more or less refinances trillions of dollars of leverage every single day. Ever had a bad day? Ever had a few in a row? Well, the world can’t afford SOFR to have a few bad days in a row… When that funding rate jumps, the cost of holding positions changes immediately. There’s no grace period or buffer. It’s like finding out your rent is due every morning, and your landlord recalculates the price while you’ve been asleep. The Permanent BackstopThe good news is that our policy is completely made up, and the points don’t matter.
Why? Because all roads point to monetary support for SOFR at all costs… You think I’m kidding? Well… let me tell you about this fantastic little rule in our Calvinball financial games. After the repo crisis of September 2019 and the near-collapse in March 2020, the Fed admitted something we still barely talk about as a functioning society... The financial system can no longer function without a permanent repo backstop. Before 2008, repo markets were largely self-funded. It was dealers, hedge funds, and banks that borrowed and lent against Treasury collateral, and the system cleared on its own. That changed after the 2008 Great Financial Crisis. Regulations forced banks to hold more capital. Balance sheet capacity (critical to refinancing) tightened up... At the same time, Treasury issuance exploded, hedge fund leverage increased, and the entire derivatives complex migrated toward SOFR-based funding. The result is now a system that depends heavily on repo financing but has fewer balance sheets willing to handle it… We need MORE, not less, refinancing capacity. That’s why the Fed now relies on two facilities (that it created) to stabilize repo... The standing repo facility now acts as a ceiling when funding markets tighten. The reverse repo facility acts as a floor under money market rates. Together, they form permanent guardrails around the repo market. This means you should ask for a fifth Mellow Corn from reading just this one article on how the markets work… And then read this critical detail. The Fed no longer just sets short-term interest rates. It now acts as the lender of last resort to the repo market itself. The central bank used to backstop banks. Now it backstops the plumbing of leverage. If all this repo funding breaks, Treasury markets break. If Treasury markets break, the global financial system breaks… in a hurry. So the Fed keeps the repo pipes open… and I’m telling you right now, they will act to pump more money into the system even in the face of higher inflation. That’s the false choice. It performs like a pseudo-permanent bailout machine… You just never knew it existed. What? You thought they were going to admit this to you when you voted? Most investors never even notice this shift. They’re still hanging out and talking about discounted cash flows and expected earnings in 2028. Nothing matters more than liquidity… NOTHING. It’s the reason the money printer never really goes away. Why This Matters Right NowSOFR and the Fed funds rate now sit in the same neighborhood. They look the same. But they don’t really behave the same. At the end of December 2025, SOFR spiked while the fed funds rate barely moved. Banks rushed to the Fed’s Standing Repo Facility and borrowed roughly $75 billion in a single day because overnight lending rates in the repo market blew past the Fed’s target range. The Fed’s tools caught it, but the signal was clear… When liquidity gets tight, SOFR moves first, and it moves fast. Now think about what is happening this week. Oil is now above $95… there’s a war on the television, the PCE Index arrives tomorrow, and a number of private credit funds have already begun gating redemptions. When the Fed meets next Wednesday, it is almost certain to hold rates. But the market’s not waiting for the Fed. The repo market is already pricing in stress, and SOFR is the canary in the coal mine. If you want to know what’s happening with borrowing costs in America, stop watching the fed funds rate. Watch SOFR. Then, watch the repo market. Then watch whether the Standing Repo Facility starts getting tapped again. That is where the pressure shows up first. And the same movie plays every day… starting… early in the morning… Isn’t finance wonderful? Stay positive, Garrett Baldwin About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.
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