The United States: 2024 is the watershed for quantitative monetary tightening
2023-12-27
■ At one point, the SOFR in the United States sharply increased, but later remained stable
■ There are signs of funding bias in the US short-term financial market, and next year's quantitative monetary tightening will also enter a watershed
On December 1st, the US Secured Overnight Financing Rate Data (SOFR) surged to 5.39%. Usually, SOFR is associated with the Federal Reserve's reverse repurchase rate (RRP rate), which is the lower limit of the Federal Reserve's policy rate orientation. However, on December 1st, the deviation between SOFR and RRP rates reached 5.30% to 0.09%. However, SOFR remained stable in the following business days and currently has limited impact on the dissemination of market-based funding tools such as repurchase transactions.
The United States established a Standing Repo Facility (SRF) in July 2021, which significantly reduces the frequency of deviation between SOFR and RRP rates in short-term financial markets, especially when there is a risk of fund supply-demand deviation at the end of each month or quarter. The sharp rise of SOFR on December 1 is because the settlement amount of US treasury bonds at the end of November is usually higher than that in normal months, and the temporary increase in capital demand is the main reason. The root cause of this includes the debt ceiling issue caused by difficulties in negotiations with the US Congress, the recovery of the US Treasury's cash balance, and correspondingly, an increase in the issuance of Treasury bills (TB) by the US Treasury. According to the Marketable Borrowing Estimates and the Quarterly Refunding Statement of the US Treasury Department, the cash balance will reach 750 billion US dollars between October and December, and it is planned to moderately reduce the issuance of TB between December and January next year. Due to the stability of TB issuance, the short-term financial market is also expected to achieve stable supply and demand of funds
However, there have been changes in the supply of funds. The Federal Reserve is continuously reducing its holdings of asset balances (quantitative tightening, QT), and it appears that the absorption of excess funds will continue. As of December 20th, the Federal Reserve held over $7.7 trillion in assets, but in terms of the debt structure that constitutes the means of funding supply, Reverse Repurchase Agreement (RRP) has sharply declined from its peak of $2.6 trillion at the end of May last year to over $1.1 trillion. This decline may be due to an increase in the issuance of substitute commodities (such as TB), an increase in yields, and the possibility of the Federal Reserve raising interest rates, resulting in a decrease in RRP. In the medium term, the focus of the short-term financial market will be on the supply and demand of funds at the end of the year. However, as the absorption of excess funds continues, how to generate deviations without causing dysfunction in the short-term capital market will become a challenge. It is expected that this challenge will emerge in 2024, and issues such as the slowdown or stagnation of quantitative monetary tightening will be put on the financial policy agenda. The short-term financial market volatility in early December may be a precursor to this trend.
■ There are signs of funding bias in the US short-term financial market, and next year's quantitative monetary tightening will also enter a watershed
On December 1st, the US Secured Overnight Financing Rate Data (SOFR) surged to 5.39%. Usually, SOFR is associated with the Federal Reserve's reverse repurchase rate (RRP rate), which is the lower limit of the Federal Reserve's policy rate orientation. However, on December 1st, the deviation between SOFR and RRP rates reached 5.30% to 0.09%. However, SOFR remained stable in the following business days and currently has limited impact on the dissemination of market-based funding tools such as repurchase transactions.
The United States established a Standing Repo Facility (SRF) in July 2021, which significantly reduces the frequency of deviation between SOFR and RRP rates in short-term financial markets, especially when there is a risk of fund supply-demand deviation at the end of each month or quarter. The sharp rise of SOFR on December 1 is because the settlement amount of US treasury bonds at the end of November is usually higher than that in normal months, and the temporary increase in capital demand is the main reason. The root cause of this includes the debt ceiling issue caused by difficulties in negotiations with the US Congress, the recovery of the US Treasury's cash balance, and correspondingly, an increase in the issuance of Treasury bills (TB) by the US Treasury. According to the Marketable Borrowing Estimates and the Quarterly Refunding Statement of the US Treasury Department, the cash balance will reach 750 billion US dollars between October and December, and it is planned to moderately reduce the issuance of TB between December and January next year. Due to the stability of TB issuance, the short-term financial market is also expected to achieve stable supply and demand of funds
However, there have been changes in the supply of funds. The Federal Reserve is continuously reducing its holdings of asset balances (quantitative tightening, QT), and it appears that the absorption of excess funds will continue. As of December 20th, the Federal Reserve held over $7.7 trillion in assets, but in terms of the debt structure that constitutes the means of funding supply, Reverse Repurchase Agreement (RRP) has sharply declined from its peak of $2.6 trillion at the end of May last year to over $1.1 trillion. This decline may be due to an increase in the issuance of substitute commodities (such as TB), an increase in yields, and the possibility of the Federal Reserve raising interest rates, resulting in a decrease in RRP. In the medium term, the focus of the short-term financial market will be on the supply and demand of funds at the end of the year. However, as the absorption of excess funds continues, how to generate deviations without causing dysfunction in the short-term capital market will become a challenge. It is expected that this challenge will emerge in 2024, and issues such as the slowdown or stagnation of quantitative monetary tightening will be put on the financial policy agenda. The short-term financial market volatility in early December may be a precursor to this trend.