Unexpected SOFR spikes reveal financial plumbing issues linked to the Fed’s balance sheet reduction and regulatory scrutiny. China’s money markets show distress amid economic challenges.
While Friday’s [unexpected SOFR] spike has already faded, Nomura’s Plantz says he expects this won’t be the last time it happens. He expects to see more volatility in financing markets as the Fed’s shrinking of its balance sheet leaves Treasury dealers stuffed with collateral. “Simply put, you are starting to see some of the implications of QT as well as sponsored repo coming home to roost,” he said.
The timing of the move is also notable, occurring as the basis trade, a popular trading strategy that relies on cheap leverage, draws scrutiny from regulators and others on Wall Street.
Signs of indigestion in China’s money markets are an ominous sign—particularly given shadow-bank troubles and enormous government debt.
Plumbing is something most of us take for granted—until there’s a problem, at which point things can get messy fast. Likewise for the “plumbing” of modern financial systems: the money markets, where banks and other financial institutions make short-term loans to each other. So given the strains China’s economy is already laboring under—including a slow-motion property sector implosion and the “serious” insolvency of Zhongzhi Enterprise Group, a large asset manager, in its own words—it isn’t a great sign that China’s money markets have recently been throwing off little blips of distress too.
There is little sign of an immediate crisis such as the one that erupted in the wake of regulators’ sudden takeover of Baoshang Bank, a midsize lender, in 2019. But unusual rate movements in recent weeks—and, reportedly, actions by authorities behind the scenes to strong-arm lenders—are still worrying.