SOFR vs IORB Flashing Red, Liquidity Drying up? Are Risks Rising?
Subscriber Data Nov3 2025
Good Afternoon Magnelibra readers, well it is not a surprise to us to see liquidity evaporating and risks mounting. We have noted over the last few weeks the risk in SOFR and in fact we want to highlight the fact that SOFR is above both the Effective Federal Funds rate and that of the IORB or Interest on Reserve Balances. Just being higher is not the anomaly, but rather the increasing widening that we are seeing accompanied by the up tick in Repo usage (firms needing liquidity) is telling us there is a bigger story behind the scenes here. Ok so let’s frame some of these concepts here:
1. What are SOFR and Federal Funds Rate?
The Federal Funds Rate (EFFR) is the volume-weighted median of overnight unsecured borrowing rates between banks (and some GSEs like FHLBs) in the federal funds market. (Unsecured, limited participants, small volume ($60–100B/day), includes GSEs (FHLBs).
(SOFR) Secured Overnight Financing Rate – volume-weighted median of overnight repo transactions collateralized by U.S. Treasuries (tri-party, General Collateral). Secured, broader participation (banks, MMFs, hedge funds, etc.), much larger volume ($1–2 trillion/day).
*Target range set by FOMC applies to EFFR, but SOFR is a market-driven secured rate.
2. Magnelibra why is SOFR Usually Higher than EFFR? Generally the SOFR > EFFR by 5–15 basis points on average (sometimes more during stress). Like today!
Ok lets explain Secured vs. Unsecured
SOFR is backed by Treasuries. Lenders in repo give up the use of high-quality collateral overnight. This has an opportunity cost.
Balance Sheet Constraints -Under Basel III (SLR, GSIB surcharges), holding Treasuries or lending in repo uses balance sheet space. Banks charge a premium for this.
GSE (Govt Sponsored Entities) Arbitrage in Fed Funds -FHLBs (major lenders in fed funds) cannot earn IORB (Interest on Reserve Balances, but can invest in repo (SOFR). However, they often lend in fed funds at below IORB to maintain banking relationships. This is what drives EFFR down.
IORB for Non-Banks -Money market funds (big SOFR lenders) cannot access IORB, so they only earn SOFR this has a tendency to push SOFR up to attract funds.
To sum this up, the EFFR is pulled down by GSE supply, SOFR is pushed up by non-bank demand and collateral cost. (We may be seeing private credit liquidity starting to see increased scrutiny)
Who Borrows in Repo (SOFR) and Why?
Prime Broker / Hedge Funds -Finance long Treasury positions (basis trades), leverage post collateral such as Treasuries, tends to cause a rise in SOFR
MMFs (Money Market Mutual Funds as lenders) -They park cash safely overnight, the receive Treasuries
Securities Lenders -Reinvest cash collateral from stock loans, post collateral like Treasuries
Banks (smaller role) -Fund inventory, arbitrage, they post Treasuries as collateral
So we have a situation today where the SOFR vs IORB spread is about 23bp wide. This is telling us there is stress underneath the funding hood and that structural conditions are deteriorating. Considering what we know about the various types of players, we want to start looking at certain entities, like Hedge Funds who put on massive basis trades and need to fund those trades at usually 50 to 100 to 1 leverage and when spreads are inverted, they fund them in a negative carry situation, meaning their funding exceeds their coupon return. We may be running into a situation where these entities are in such a huge funding demand that the banks are recognizing the risks and pulling liquidity back at the same time, causing short term funding rates to rise.
Here is the chart:
We have also seen an increase in social media posts talking about rising defaults and bad PIK deals. PIK stands for Payment in Kind, more simply we could define it as a deferral of payment which is then added onto the existing back end of the loan, the non payment increases the balance, but offers the borrower a chance to play catch up. So the risks to keep an eye out for are starting to trickle into main stream outlets:
Rising Defaults & “Bad PIK”: Lenders adding PIK to defer cash payments, truly hiding the real distress. Defaults at 6% (highest since pandemic).
Stricter Terms: Banks adding “blockers” (e.g., J. Crew clauses) to prevent upstart debt prep for restructurings. These clauses are lender protective provisions included in debt agreements to prevent borrowers from stripping collateral out of the reach of existing lenders. (oh the games they play)
Liquidity Ties: Some link to Fed repo surges ($15–50B usage) and insurer exposure. We have mentioned this before in consideration of the massive amount of CRE write downs and the exposure of the insurers and reinsurers.
All in all we continue to here that all of this is contained and not systemic, that there are ample Reserves in the system. Don’t fall for it, reserves are not “liquidity” for us they are more of a cash hoard never to be touched, or even more so encumbered already if you will.
So there is no surprise that today’s market action is catching on to this funding stress. We know Buffett has already told us where he stands in all of this, his cash horde speaks for itself:
We also know that the Ai mania is well out of hand and out of statistical bounds and priced for future perfection, this Statista chart sums up how just one company can steal the show. Nvidia being worth more than Alphabet and META combined? Seriously, this never ends well:
So that leads us to the moves in the markets that we are seeing today. Let’s take a quick look and we want to start off with Bitcoin. We normally reserve this for our Founding Member Digital Strategy section but this is too important to not share. The embedded leverage that is being systematically wiped out on the Binance Exchange is massive, we see post after post of accounts getting liquidated on X:
The list goes on and on like this, but this is the difference in defining, gambling vs trading. Gamblers take any and all risk, whereas the outcome is generally a 97% against in regards to success. Traders, well they take calculated risks and generally will not risk the whole lot, but percentage base their efforts based upon Capital Constraints and Risk Tolerances. Take it from us after 25 years in the trenches, you live, you learn and you fight another day. You will never last a day in this business if you do not respect both the markets and even more so, yourself!
Ok as far as Bitcoin, its getting monkey hammered today trading at $99,985 which is down -$7065 per our closing mark yesterday or -6.6% on the day:
As far as the weekly chart $93k is massive and a likely stopping point for this initial leverage purge!
As far as the equity futures markets the Nasdaq index is near our weekly support at 25,550. Its -1.9% on the day:
As far as the SP500 futures, we talked about it on Friday that if the SP closes the week down and we get a gap down Sunday look out. Well we didn’t get the gap down, but this chart structure is still the same, this is disastrous. The SP has blown through our weekly support level of 6825 and trading near 6800:
We also want to post the US Dollar which is clearly breaking out here, defying Jeff Gundlachs assessment of a weaker USD. We love Jeff and Doubleline, but the USD looks like its going to continue to rise here:
Lets look at the Gold futures, where this will be the third weekly decline should it hold down here and most likely looking at a test of 3750/3875 area:
Finally we will look at the spread between the SP500 futures and the Nasdaq futures. We noted this long term support area last week in one of our posts. Well as you can see once again, this area is proving formidable. We would like to focus on the weekly close but this chart does look constructive for some diversification out of NQ at least:
Ok that is all we will say for now, readers please enjoy a free look at our Subscriber section. We are including it in today’s post for your viewing pleasure and a taste of what we try to provide to our subscribers each and every day. We highly recommend that you become a subscriber and enjoy our global macro viewpoints and also consider becoming a Founding Member to enjoy our added bonus incentives that comes with our Founding Member Digital Strategy Membership. As always at the least consideration, share our work with all your friends and family, show them how smart you are!
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Magnelibra CTA Futures Market Trend Sentiment (Our proprietary commodity trading advisory futures market sentiment long/neutral/short market flows indicator) The portfolio is made up of the core futures markets we cover and the indicators are for single contracts of the futures market, whether long, short or zero neutral. The P+L is generated via the starting daily position and the ending daily settlement. This is considered a high risk alternative strategy. However most investors should leave a portion of their overall portfolio within a high risk basket. Some of the percentages of the overall portfolio dedicated to high risk should vary from 3% to 18% depending on ones overall time to invest and risk profiles. We added the Sharpe to our data now as well for those quantitative types!
NOTABLE CHANGES: Team Magnelibra, please review the month end changes and adjust your bias accordingly. The model went long the NQ for the first time in awhile yesterday, but its on a tight leash. We expect the SP500 to move to a neutral position at today’s end as will the Nikkei most likely. We will keep you posted!
Move to “1” Long Bias:
Move to “0” Neutral Bias:
Move to “-1” Short Bias: A6
*We corrected the Sept. data, today’s update has all corrections and updates*
The U.S. Bond Yield Curve (This is our daily graphic displaying the U.S. bond market yield curve changes. We follow the 2 year thru 30 year durations. Please note that bond prices work inversely to yield changes so for instance if bond prices are rising and moving upward, then their yields are falling or moving downward. We also track the relationship between the durations known as US Yield Curve Spreads, when we list it as 2s5, we are comparing the yield differential between the 2 year vs the 5 year with the positive/negative viewed from the higher durations perspective.
The US yield curve saw a decent steepening move as the shorter durations outpaced the gains in the longer durations:
Daily Settlement Sheet (Magnelibra Futures and Cash bond market coverage of the daily settlement prices and dollar value of the contracts given move)
We are going to separate our settlement page into the various market segments for a much easier visual for you guys to follow. First up the
US Interest Rate Futures and Cash Markets plus Yield and Inter-commodity Spreads:
Equity Index Futures:
Dollar and FX Futures:
Energy Futures:
Metal Futures:
German Futures:
The 5 & 30 Day rolling changes with top 3 Winners and losers (The last 5 trading days and 22 trading days net changes)
Magnelibra MEGA9s Portfolio Tracker (This is a synthetic long only portfolio of the Top 9 largest equities by market cap. We started this tracker because we understand Ai dominates the investment landscape and operates in a binary construct. What we mean is that it issues a buy or a sell and will do so in reinforcing mechanisms, meaning if alpha is rising it will add, if it is falling it well sell and remove. We also created a “hedge” for those that want a more active approach to tactically maximizing their long only static portfolio of equities)
Apple is back in the #2 spot now with Broadcom jumping META now into the 6th spot. This weeks hedge is the 625 put for $3 or better:
MEGA9s total market cap chart (This chart represents the total market cap of the MEGA9s and lists the 21pMA in pink along with the 50p and 200p MA)
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The MFDS is now +3.53% vs the Equal Weight -1.03%, ZCash the outperformer in our top 10 basket, really seeing some biased flows there, we do not advocate for Zcash as we view XMR as far superior in all facets in the privacy coin race:
We will also highlight the strategy with a data chart for a visual representation:
*This is our digital strategy chart where we will be basing our discretionary bonus at the end of the year to our Founding subscribers. Our goal is to enhance the members experience to become a bit more interactive even if they are not taking the initiative to actively invest in digital strategies, we here at Magnelibra will try to proactively on a discretionary basis reward our subscribers.
Strategy Inc / BTC Trading Tracker (Bitcoin vs MSTR equity, Our Strategy Inc. Covered Call Portfolio Tracker, Long 100 shares MSTR and short 1, 3% to 7% out of the money call on Monday’s open each week) For those playing along at home, please note, this long MSTR strategy that incorporates a short covered call hedge is something you cannot pick and choose to do one week to the next! This is a mandatory weekly hedge vs your long holdings. Volatility continues to get stripped out and crushed, buying Bitcoin outright vs MSTR is always the preferred exposure, if you were wondering.
If you want BTC exposure, your better off owning the BTC outright and not some pseudo derivative like MSTR. If you want exposure via MSTR, then we suggest if your account value warrants it, to sell covered calls to hedge your risk and lower your overall risk over time.
This weeks hedge is the 11/7 expiry $275 Call. The call selling strategy is +5.5% since 12/1/24 vs MSTR -30.4% so you can see the protection this provides over the last year:
Strategy Inc. added more shares and BTC yesterday and we also used their most recent 10Q to equalize our BTC yield numbers, we had to adjust the total diluted to match their output but we feel correcting this data to match made sense. MSTR premium is 1.30x, their BTC/MSTR shares fell to 0.1903%. Their BTC Yield was 26.1% and their target shares/BTC was 851 well above their estimates for the year (not a good thing):
Let’s add the BTC vs Tether market cap chart here now:
This is updated as of 3pm Est. today, this is with the crypto market getting clobbered dropping over $200bn or so. It will be interesting to see if Tether burns or if the market cap rises miraculously as the digital currency space loses market cap. We suspect as we always have that Tether is speculating and doesn’t hold 1 for 1 assets and that a real bear market will expose this.
Ok members, take the day and seize it, know your going to win and win!
Thank you guys, appreciate all the support and thank you for reading our work.
Have a great day!
-Team Magnelibra
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Anyone interested in investing in Monero (XMR) please reach out, we have a link to Kraken below if you use my referral code or link to try it, we’ll both earn 75 USD when you trade $200 USD of crypto in the app!
Code: y4wsyws7
Link: https://proinvite.kraken.com/9f1e/11l9bp1z
Additionally we would be glad to consult anyone interested in getting involved here. As always we view these crypto currencies in the same realm as futures, high risk, high reward, and every portfolio should have a small percentage of their overall portfolio in investments like this.
So if interested please reach out to the email below directly and we can discuss this further. The future of financial payment systems will be digital decentralized and we are still in the infancy of this fascinating technology!
If anyone is interested in working on a digital currency project and joining in as a core investor to help lay the foundation for what is to come, please reach out!