Barclays said US overnight finance rates will remain elevated for several weeks.
U.S. overnight finance rates, which soared to a record high of 5.4% last Thursday ahead of the end of the year, are likely to continue rising in the coming weeks due to strong demand for funds, according to Joseph Abate, strategist at Barclays BARC.
The Secured Overnight Financing Rate (SOFR) should remain at about 5.33%, Abate wrote in a note Tuesday. This interest rate is used to measure the cost of borrowing cash overnight, collateralized by Treasury bills. Borrowers tend to be institutions such as banks, but may also be money market funds or hedge funds.
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SOFR spiked again in early December and late last month, compared to the 2019 period when short-term lending rates soared, prompting the Federal Reserve to intervene. As of Tuesday, one of the biggest questions weighing on bonds was how long it would take the market for SOFR to stabilize again.
“SOFR surged late in the year as strong demand for funds reduced dealer balance sheet capacity. SOFR will decline slowly this week, although capacity should loosen,” Abate wrote. He said demand for funds would likely keep interest rates around 5.33% for the next few weeks.
For now, “the need for funds is outstripping dealers’ ability to raise funds,” according to Abate. Meanwhile, “events such as SOFR surges (in early and late December) are likely to become more frequent.”
Tuesday, 1-BX:TMUBMUSD01Y to 30-year Treasury yields BX:TM U BMUSD30Y closed the New York trading session higher as investors sold government debt ahead of the Federal Reserve’s December meeting minutes on Wednesday.
