An overnight rate is the annualized interest rate for funds borrowed for one business day; it may be secured, unsecured, market-based, administered, or policy-targeted.
An overnight rate is the annualized interest rate for borrowing funds for one business day, with repayment on the next business day. Depending on the benchmark, the transaction may be secured by collateral or unsecured, and the published number may be transaction-based, administered, or a central-bank policy target.
The phrase does not identify one universal rate. SOFR, SONIA, €STR, the effective federal funds rate, and a central bank’s target rate all describe different markets or policy concepts.
| Type | What it represents | Example |
|---|---|---|
| Secured market rate | Overnight cash borrowing backed by collateral | SOFR |
| Unsecured wholesale rate | Overnight borrowing without pledged collateral | SONIA, €STR |
| Interbank reserve rate | Overnight trades in reserve or settlement balances | Effective federal funds rate |
| Central-bank target or administered rate | Policy target or facility rate influencing overnight markets | Federal funds target range, deposit-facility rate |
| Compounded overnight rate | Daily overnight observations accumulated over a longer period | Compounded SONIA or compounded SOFR |
These categories can interact without being interchangeable. A policy rate influences market overnight rates, while market rates also reflect liquidity, collateral, balance-sheet capacity, and transaction composition.
A secured overnight loan is backed by collateral. In a repurchase transaction, securities are sold with an agreement to repurchase them later. Collateral type, haircut, settlement, and market demand can affect the rate.
An unsecured overnight deposit relies on the borrower’s promise to repay. Credit exposure is limited by the short maturity but is not literally zero.
| Feature | Secured overnight funding | Unsecured overnight funding |
|---|---|---|
| Credit protection | Eligible collateral | No pledged collateral |
| Additional driver | Collateral scarcity and repo conditions | Borrower credit and deposit-market conditions |
| Example | SOFR | SONIA or €STR |
| Interpretation | Cost of collateralized cash funding | Cost of unsecured wholesale borrowing |
Calling both “near risk-free” does not mean they should have the same level.
For principal (P), annualized overnight rate (r), applicable calendar days (d), and day-count denominator (D), simple overnight interest is:
The day-count basis depends on the currency and contract. The rate from a Friday transaction may apply for three calendar days when repayment occurs Monday, so (d) is not always one.
Suppose a bank borrows $50 million overnight on Friday at an annualized rate of 5.25%. Repayment occurs Monday, and the transaction uses Actual/360.
The rate applies for three calendar days:
If the same rate applied for only one calendar day, interest would be $7,291.67. Weekend and holiday weighting therefore matters even when the financial maturity is called overnight.
A one-month or three-month loan cannot normally use just one isolated overnight fixing. It may apply:
A simplified compounded return is:
where each rate (r_i) applies for (d_i) calendar days. The contract may annualize the result and add a margin, spread adjustment, or floor.
Compounding in arrears creates a timing issue: the final period rate is not fully known until near the period end. Lookbacks, observation shifts, and payment delays provide operational time but can produce different values.
Central banks implement policy by influencing overnight market conditions. Changes in policy rates and reserve remuneration can pass through to overnight funding, then to term yields, loans, exchange rates, and asset prices.
The pass-through is strong but not mechanical. Market rates can differ from policy targets because of reserve supply, collateral demand, reporting populations, and balance-sheet constraints.
Major overnight rates became central to global benchmark reform because they are based on broad transaction markets and contain less term bank-credit judgment than historical LIBOR. Alternative reference rates include SOFR, SONIA, €STR, TONA, and other currency-specific benchmarks.
Overnight-indexed swaps and discount curves help price derivatives and measure interest-rate exposure. Treasury teams also monitor overnight markets for short-term liquidity and funding conditions.
Before comparing two rates, identify:
This article provides general financial education, not personalized investment, borrowing, accounting, tax, or legal advice. Use the governing contract and official administrator data for operational calculations.