Guotai Haitong has released a research report noting that since late October, the Secured Overnight Financing Rate (SOFR) has consistently exceeded the Interest on Reserve Balances (IORB), and combined with the Federal Reserve's rate hikes, market concerns over dollar liquidity have intensified. The firm traced the flow of funds layer by layer from onshore to offshore to the real economy, concluding that dollar liquidity has not yet become the primary factor influencing asset pricing, but the marginal tightening deserves attention. Current onshore dollar liquidity pressure is concentrated in the repo market, while the interbank market remains stable; offshore dollar supply is ample; transmission to the real economy is diverging, with commercial paper and loans continuing to expand while corporate bond issuance contracts, with pressure concentrated in low-rated issuers such as CCC-rated companies. In the period around year-end, attention should be paid to whether repo market stress spreads to the interbank market, and whether credit pressure in bond market issuance extends to higher-rated segments.
Onshore liquidity: repo market under pressure first, interbank market remains stable. Rate hikes push the entire interest rate corridor upward, and judging whether interbank liquidity is tightening depends on where market rates sit within the corridor. Since October 23, SOFR has consistently exceeded IORB, with the three spreads — SOFR−IORB, SOFR−ON RRP, and SOFR−EFFR — all at or above the 90th percentile since November 2021. Idle funds held by money market funds at the ON RRP facility have been essentially depleted, and the repo market has begun relying on bank reserves. The interbank market remains stable, with EFFR−IORB holding at -2bp, and reserves as a share of total bank assets at 11.2%, still in the ample range. Looking ahead, the TGA will rise in stages to approximately $1.025 trillion in late November and late January next year, and combined with banks compressing their balance sheets at year-end, if SOFR−IORB persistently exceeds 10bp or the SOFR tail widens notably, pressure could spread from the repo market to the interbank market.
Offshore liquidity: cross-currency basis is narrow, offshore dollar supply is ample. The 3-month euro cross-currency basis stands at -2.1bp, essentially near zero, indicating ample dollar liquidity in European markets; the yen basis has long been below the euro basis because Japanese life insurers, banks, and other institutions hold large amounts of dollar assets and hedge currency risk through FX swaps, creating persistent one-sided demand for swap dollars. The yen basis has widened somewhat compared to September but remains better than the median since 2021.
Transmission to the real economy: financing costs are rising, financing volumes diverge by channel, and pressure on low-rated corporate financing is increasing. Examining the three channels — commercial paper, bank loans, and corporate bonds — in order of cost from low to high, financing costs have risen after rate hikes, but volume growth has diverged: commercial paper balances grew 13.7% year-on-year and commercial and industrial loans grew 11.5% year-on-year, indicating that short-term financing and credit channels remain open, which also confirms the resilience of the U.S. economy; corporate bond issuance, however, contracted notably after rate hikes, with investment-grade and high-yield issuance falling 20% and 12% year-on-year respectively in September–October. Current pressure is concentrated at the weaker end of credit quality, with CCC-rated spreads rising to 13.20%, exceeding the peak during the reciprocal tariff shock in April 2025, and high-yield bond issuance falling 34% year-on-year in October, with low-rated companies seeing both volume and pricing deteriorate simultaneously. If pressure spreads from CCC-rated to B-rated and BB-rated segments, financing conditions will tighten across the board starting from the tail end.
Overseas economy: crude oil plunges, U.S. manufacturing sentiment strengthens. Global assets: crude oil fell sharply, with gold and Hong Kong stocks leading gains. Expectations for U.S.-Iran peace talks intensified, with Brent crude falling 16.7% for the week; gold and the Hang Seng Index both rose about 5%, while the Nikkei 225 fell 9.3%; the 10-year U.S. Treasury yield declined 8bp.
U.S. economy: manufacturing strengthens, household confidence remains weak. The October ISM manufacturing PMI rose to 55.5, but the prices sub-index remains elevated; the preliminary November University of Michigan consumer sentiment reading fell to 42.8, with inflation expectations moderating somewhat.
Risk warnings: Federal Reserve monetary policy more hawkish than expected; low-rated corporate credit risk spreading more than expected; geopolitical uncertainty exceeding expectations.
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