The spread between the Secured Overnight Financing Rate (SOFR) and the US Treasury 10-year yield is a key indicator for investors, economists, and policymakers to assess the health of the financial markets and the economy. SOFR is a benchmark interest rate that measures the cost of borrowing cash overnight using US Treasury securities as collateral, while the US Treasury 10-year yield represents the interest rate on the 10-year US Treasury bond. The spread between these two rates provides important insights into the credit and liquidity conditions in the financial system.

One of the key factors driving the spread between SOFR and the 10-year Treasury Note yield is the level of risk aversion in the market. When investors become more risk-averse, they tend to demand higher yields on longer-term assets such as Treasury Notes, leading to an increase in the yield spread. On the other hand, when risk-aversion is low, investors may be willing to accept lesser yields, resulting in a narrower spread.

Using TraditionData’s SOFR Rate and US Treasury Dataset, we can see just how the volatility of the US Treasury market over the last 30 days has proved a true barometer for investor risk appetite by examining the timing of the spread’s widening and narrowing:

10-year US Treasury rates held mostly constant through the start of March with a rapid decline following the Executive Order issued to apply 25% tariffs to automobiles and automobile parts made on March 26. The sharp increase in the yield for the 10-year note starting from April 4 was a precursor to the April 9th White House announcement to apply a 90-day pause to most Tariffs, which finally saw the start of a downward trend for the 10-year yield on April 11 that has now reversed to end the trading week on April 17.

When evaluated against the SOFR rate, the 10-year Treasury yield on the date of April 10 becomes significant as this represents a changing of a positive spread to negative spread after a week of record-wide spreads. This change suggests that the market believed it was moving toward favorable conditions as evidenced in the positive market response to the day being the first effective day of the 90-day tariff pause on all countries with the exception of China.

This set off a narrowing spread between SOFR and the 10-year yield which is indicative of an improved market environment. Conversely, the end of last week saw another inflection of the SOFR and 10-year yield spread by April 15. This coincides with the sudden China tariffs that went into effect on April 12. This turn to a positive spread to start this week suggests the start of a period of market stress, anticipated restrictive monetary policy, and/or reduced availability of short-term capital. As of the most recent trading day close, April 17, the spread is equal to 0 again (for the 5th time in less than a month.) For now, the curve restored to a spread value similar to that of 30 days prior but as we have seen, this has the potential to move quickly in either direction.

As investors and policymakers navigate through these uncertainties, it is important to closely monitor developments in both short-term funding markets and long-term government bond yields to gauge the overall health of the economy and financial markets.
With TraditionData, investors can easily track investor sentiment by leveraging our curated market data, including general collateral repo trade volume and US Treasury quote and yield information. By analyzing the SOFR-US Treasury 10-year yield Spread, investors can make more informed decisions and effectively manage their risk in today’s intricate financial landscape.

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