Why the 3-Year SOFR–OIS Spread Blowing Out Over 30 bps Screams Stress

Think of this spread as the “extra tax” the market pays to lock in money for three years.

• OIS = the market’s clean forecast of Fed policy (almost no noise).

• SOFR swap = the same thing, plus all the real-world headaches of rolling funding, posting collateral, and using balance sheet.

• The difference (SOFR–OIS) = the anxiety premium.

Why it matters

• In calm times, that premium is tiny (a few basis points).

• If it explodes to 30+ bps, it means banks and dealers are saying:
  “I’ll give you term money—but only if you pay me a big fear premium, because balance sheets are tight and collateral is scarce.”

Why it’s not “just higher rate expectations”

• If the Fed outlook changes, both SOFR and OIS move together.

• The spread is the difference. If the difference is what’s blowing out, it can’t be explained by policy expectations—it’s stress.

Why it doesn’t “just happen”

• In normal times, arbitragers may collapse that gap for profit.

• If the spread stays wide, it’s because those arbitragers can’t or won’t deploy balance sheet. That’s what stress looks like.

Why it connects to silver

When the system charges an anxiety tax for term funding, it’s a sign of fragile plumbing. Fragile plumbing means safe, real collateral (gold and silver) gain appeal. That’s why the same backdrop showing:

• Deeply negative 10 year swap spread (lack of liquidity in Treasuries),

• Thin reverse repo balances (liquidity cushion gone),

• CHF strength (flight to safety), and now SOFR–OIS >30 bps all rhyme with the same message: capital is nervous, and real assets are insurance.

Bottom line:
A 3-year SOFR–OIS spread over 30 bps isn’t noise—it’s the market charging a fear premium to lend. That is funding stress in plain sight. And that’s the kind of stress that fuels silver’s breakout.

The Reverse Repo Well Is Running Dry — and That Matters

Since August 5th, reverse repos (RRP) have sat under $100B. That’s not just a number. Reverse repos are the Fed’s “overflow tank” of cash: when the system has too much liquidity, money parks there overnight. When it drains below $100B, it means that overflow cushion is basically gone.

Why this is critical

• When the tank is empty, every dollar of funding demand has to be met in the wild market—repos, swaps, dealer balance sheets.

• That’s when cracks show up: 3 Year SOFR–OIS blowing out over 30 bps, negative swap spreads, CHF surging. It’s all one story: balance sheets are tight and collateral is scarce.

Reading between the lines

Last time reverse repos stayed below $100B for weeks (Feb 2024), markets rolled over the next month. Why? Because the buffer was gone. With no excess cushion, even small shocks force dealers to reprice risk, dump assets, and raise cash.

Now we’re back here again:

• Reverse repos drained.

• 3 Year SOFR–OIS screaming mid-term anxiety premium.

• Long-end yields pushing cycle highs in Japan and the US.

This isn’t noise—it’s the plumbing telling you it’s brittle.

The connection to silver

When the system loses its liquidity cushion, the game shifts. Paper promises get more expensive, term funding carries a fear premium, and “safe collateral” rises in value. Silver isn’t just trading a chart—it’s trading the story of collateral scarcity itself.

So when you see:

• Reverse repos under $100B,

• 3 Year SOFR–OIS spread >30 bps,

• 10 Year swap spread at -25.9bps

• CHF flirting with the .8 threshold

you’re seeing the same signal flashing: fragility premium going bid.

Bottom line:
The reverse repo drain is the silent backdrop to everything else. It means the market’s safety net has vanished. And just like in February, this suggests that once the tank is dry for a sustained period, markets stumble. That stumble is exactly what turns silver’s $40 breakout into the start of a much larger rerating.

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Luke Lovett
Cell: 704.497.7324
Undervalued Assets | Sovereign Signal
Email: [email protected]

Disclaimer:
This content is for educational purposes only—not financial, legal, tax, or investment advice. I’m not a licensed advisor, and nothing herein should be relied upon to make investment decisions. Markets change fast. While accuracy is the goal, no guarantees are made. Past performance ≠ future results. Some insights paraphrase third-party experts for commentary—without endorsement or affiliation. Always do your own research and consult a licensed professional before investing. I do not sell metals, process transactions, or hold funds. All orders go directly through licensed dealers.