Overnight Rate: Definition & Meaning | Bondfish
The overnight rate is the interest rate charged on the shortest-term loans in the financial system (typically borrowed today and repaid the next business day), and it forms the base layer for most money-market and bond reference rates.
What it means
Central banks set a target overnight rate (the Fed funds rate in the U.S., the deposit facility rate in the euro area, the cash rate in Australia) that anchors the cost of the shortest-term borrowing between banks. From that anchor, markets build a family of published overnight reference rates: SOFR in the U.S., €STR in the eurozone, SONIA in the U.K., SARON in Switzerland. Each is calculated from actual overnight transactions rather than bank estimates, which is why they replaced LIBOR after 2021–2023.
Because these rates cover only a single day, floating-rate bonds and loans generally reference a compounded overnight rate over a longer period (a month or a quarter) rather than the daily print itself.
Why it matters for bond investors
The overnight rate is the ceiling for how far a central bank has moved short-term policy, and it flows through to everything longer-dated: money-market fund yields, floating-rate note coupons, and the discount rate used to price bonds. When the overnight rate rises, new floating-rate coupons rise with it; when it falls, income on floating-rate holdings falls too. Comparing a bond's coupon formula ("overnight rate + spread") against the current overnight rate level is the quickest way to estimate what it will actually pay next quarter.
Related terms
This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal.