On July 1, the Secured Overnight Financing Rate (SOFR) jumped to 5.4%, a record high.#SOFR It is an overnight reverse repo transaction between U.S. financial institutions (mainly banks), where the borrower sells its U.S. Treasury bonds to the lender and promises to repurchase these securities at a slightly higher price the next day (overnight). This slightly higher portion is equivalent to the interest on the Treasury bond as collateral, which is quite close to the risk-free interest rate in the market. Since its launch in 2018, SOFR has gradually replaced the traditional LIBOR (London Interbank Offered Rate) and become the most critical reference rate in the financial market.
So what is the reason for the surge in SOFR interest rates? To understand this question, we need to first recognize two facts: First, the Ministry of Finance collected the second quarter corporate tax from the whole country on June 15. Before paying taxes, these money are usually deposited in banks or money market funds (MMF). These two are traditional buyers of medium- and long-term bonds (Note, Bond) and short-term bonds (Bill), and the purchasing power of government bonds has declined periodically. Second, the Ministry of Finance has been issuing a large number of government bonds to fill the fiscal deficit, and in recent months, there has been a trend of increasing issuance, and the supply of government bonds is seriously oversupplied.
The imbalance between supply and demand has left more Treasury bonds waiting to be absorbed in the repo market. The amount that can be sold or pledged (i.e. borrowers) far exceeds the demand for purchases (i.e. lenders). In other words, more people are borrowing money through SOFR, while less money can be lent out, so the SOFR rate has soared.
The last time this happened was in September 2019, when the quarterly taxation drained the market of idle money and the large Treasury auctions were also held. The Fed then created a new repo loan facility (an ultra-low interest loan) to print money in disguise, providing banks with $100 billion per month to support their Treasury purchases and overnight dismantling activities.
SOFR represents the real liquidity demand in the secondary market and is more direct than the federal funds rate. The new high in early July is an important signal that the bond market has indeed reached its limit. The bond market, especially the Treasury bond market, is the core of the financial system. Many financial institutions (including banks, insurance companies, pension funds, etc.) hold a large number of bonds as assets. If the bond market fluctuates violently, it may cause the value of these institutions' assets to drop sharply, thereby triggering systemic risks.#美联储 Hand Grip#利率 The primary purpose of the market valve is to ensure the smooth operation of the U.S. Treasury market. Therefore, they may sacrifice a certain amount of inflation and invent various policy tools to print money, resulting in high interest rate tightening on the surface but quantitative easing in fact, to provide banks with more funds to tide over the difficulties in the bond market.
#国债
