Cathay Pacific Haitong: Will US dollar liquidity become a core contradiction?
The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that since late October, the SOFR guaranteed overnight financing interest rate has been continuously higher than the reserve balance interest rate IORB, compounded by the Federal Reserve's restart interest rate hike, and market concerns about US dollar liquidity have heated up. The bank follows the flow of capital, from onshore and offshore to entities, and observes that the current liquidity of the US dollar has not yet become the main contradiction affecting asset pricing, but marginal tightening is worth paying attention to. Currently, onshore dollar liquidity pressure is concentrated in the repurchase market, and banks are still stable; offshore dollar supply is abundant; transmission to entities is fragmented, notes and loans continue to expand, and corporate bond issuance is shrinking. The pressure is concentrated on low-rated companies such as CCC level. Around the end of the year, we need to pay attention to whether the pressure in the repurchase market spreads to banks, and whether the pressure to issue credit in the bond market spreads to higher ratings.
Cathay Pacific Haitong's main views are as follows:
Onshore liquidity: The repurchase market took the lead, and the interbank market remained stable. Interest rate hikes will move the overall interest rate corridor upward, and judging whether inter-agency liquidity is tightened depends on the position of market interest rates within the corridor. Since October 23, SOFR has been continuously higher than IORB. The three interest spreads for SOFR-IORB, SOFR-ON RRP, and SOFR-EFFR have all been above 90% since November 2021. The idle funds held by the IMF in ON RRP have basically been exhausted, and the repurchase market has begun to rely on bank reserves. The interbank market remains stable, EFFR-iORB remains at -2bp, and reserves account for 11.2% of the bank's total assets, which is still in a sufficient range. Looking back, in late November and late January next year, the TGA will gradually rise to about 1.025 trillion US dollars, compounding the bank's balance sheet compression at the end of the year. If SOFR-iORB continues to rise above 10bp or the end of SOFR widens significantly, the pressure may spread from the repurchase market to the interbank market.
Offshore liquidity: The cross-currency base is narrow, and the offshore dollar supply is abundant. The 3-month base spread of the euro is -2.1 bps, which is basically close to the zero axis, and the dollar has abundant liquidity in the European market; the yen base has been lower than the euro for a long time because Japanese life insurance, banks and other institutions hold large amounts of US dollar assets and hedge exchange rate risks through foreign exchange swaps, and there is continuous unilateral demand for US dollar swaps. The yen base spread was wider than in September, but it is still better than the median since 2021.
Transmission to entities: Financing costs are rising, the scale of financing is divided according to channels, and the financing pressure on low-rated enterprises is increasing. Looking at the three channels of commercial paper, bank loans, and corporate bonds from low to high cost, financing costs moved upward after the interest rate hike, but the scale growth rate was divided: bill balances increased 13.7% year on year, industrial and commercial loans increased 11.5% year on year, and short-term financing and credit channels remained smooth, which also confirmed the resilience of the US economy; corporate bond issuance contracted markedly after interest rate hikes, and the issuance of investment-grade and high-yield bonds fell 20% and 12% year on year, respectively. The current pressure is concentrated on the credit side. CCC interest spreads rose to 13.20%, exceeding the high point when equal tariffs hit in April 2025. The issuance of high-yield bonds fell 34% year on year in October, and the volume and price of low-rated companies weakened simultaneously. If the pressure spreads from the CCC level to the B level and BB level, the overall financing conditions will be tightened starting at the end.
Overseas economies: Crude oil plummeted, US manufacturing boom strengthened
Global assets: Crude oil plummeted, with gold and Hong Kong stocks leading the way. Expectations for peace talks between the US and Iran are heating up, with oil falling 16.7% this week; the gold and Hang Seng indices both rose by about 5%; Nikkei 225 plummeted 9.3%; and 10-year US Treasury yields fell 8 bps.
US economy: The manufacturing industry is strengthening, and residents' confidence is sluggish. The ISM manufacturing PMI rose to 55.5 in October, but the price segment was still high; the initial value of consumer confidence in Michigan fell to 42.8 in November, and inflation expectations declined somewhat.
Risk warning: The Federal Reserve's monetary policy is hawkish; the credit risk of low-rated companies spreads beyond expectations; the uncertainty of the geopolitical situation exceeds expectations.