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The Overnight U.S. Financing Rate Remains Elevated


The overnight U.S. financing rate reached a new high of 5.4% last Thursday due to strong demand for funding. Strategist Joseph Abate of Barclays predicts that this elevated rate will persist over the next few weeks. The Secured Overnight Financing Rate (SOFR), used to measure the cost of borrowing cash overnight collateralized by Treasury securities, is expected to hover around 5.33%.

Similarities to the 2019 Period

The recent spikes in SOFR, both in early December and at the end of last month, have drawn comparisons to similar events in 2019 that prompted intervention from the Federal Reserve. The bond market now wonders how long it will take for SOFR to stabilize.

Slow Decline Expected

Abate suggests that although dealer balance-sheet capacity may loosen up, SOFR may only decline gradually this week due to the high demand for funding. He foresees the rate remaining around 5.33% for the coming weeks.

Demand Outstripping Dealer Capacity

Abate notes that the current demand for funding exceeds the ability of dealers to provide financing. Consequently, spikes in SOFR, such as the ones witnessed in December, are likely to become more common.

Treasury Yields Finish Higher

On Tuesday, Treasury yields from 1-year to 30-year finished higher during the New York trading session. This increase in yields occurred as investors sold off government debt ahead of the release of the Federal Reserve’s December meeting minutes on Wednesday.

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