Overnight U.S. financing rate likely to remain elevated for weeks, Barclays says

By Vivien Lou Chen

The overnight U.S. financing rate, which soared to a record high of 5.4% last Thursday ahead of year-end, is likely to remain elevated over the next few weeks because of robust demand for funding, according to strategist Joseph Abate of Barclays (UK:BARC).

SOFR, or the Secured Overnight Financing Rate, should stay around 5.33%, Abate wrote in a note on Tuesday. The rate is used to measure the cost of borrowing cash overnight that's collateralized by Treasury securities. Borrowers tend to be institutions such as banks, but can also be money-market funds and hedge funds.

Read: Something strange is happening in the financial plumbing under Wall StreetSOFR spiked in early December and again at the end of last month, drawing comparisons to the 2019 period when a surge in short-term lending rates forced the Federal Reserve to step in. As of Tuesday, one of the biggest questions weighing on the bond market was how long it will take for SOFR to settle back down again.

"SOFR spiked at year-end as strong demand for funding ran into reduced dealer balance-sheet capacity. Although capacity should loosen up, SOFR may only decline slowly this week," Abate wrote. He said demand for funding should keep the rate around 5.33% for the next few weeks.

For now, "the demand for funding is outstripping the ability of dealers to provide financing," according to Abate. Meanwhile, "bouts like the early (and late) December spike in SOFR are likely to become more frequent."

On Tuesday, one- BX:TMUBMUSD01Y through 30-year Treasury yields BX:TMUBMUSD30Y finished the New York trading session higher, as investors sold off government debt ahead of Wednesday's release of the Fed's December meeting minutes.

-Vivien Lou Chen

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01-02-24 1523ET

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