Liquidity indicator flashes red light! The key lending rate SOFR in the United States hits its highest increase this year.

This week, a key interest rate in the U.S. financial system has risen significantly, exceeding the target range set by the Federal Reserve. This phenomenon is attributed to a continuous decrease in liquidity, which is caused by the settlement of U.S. Treasury bond auctions and the approaching quarterly corporate tax payment dates. According to the latest data released by the New York Fed on Tuesday, the Secured Overnight Financing Rate (SOFR) increased from 4.42% on the previous trading day to 4.51% on September 15, marking the largest increase in this rate since December 31 of last year. This short-term loan benchmark rate is related to repo market activities. This increase has widened the gap between SOFR and the actual federal funds rate to 18 basis points the largest gap since December 26 of last year; policymakers are expected to cut the federal funds rate by 25 basis points on Wednesday. This rate is 11 basis points higher than the rate paid by the Federal Reserve on reserves held at the central bank currently at 4.40%. The overnight financing rate used for interbank lending between banks and asset management companies has been steadily increasing, as the U.S. Treasury is expanding its cash reserves while the Federal Reserve is reducing its balance sheet. Meanwhile, the usage of an overnight lending facility by the Federal Reserve (which has long been seen as a gauge of excess liquidity in the funding markets) has dropped to the lowest level in four years. In early September, repo rates exceeded the Federal Reserve's target range for overnight lending rates, and have since remained at elevated levels. Despite the recent sharp increase in benchmark rates, market participants still expect a brief period of calm before the end of the quarter, after which market volatility is expected to intensify. This is because two long-term issuances of Cash Management Bills (usually with a term of less than 1 month) are set to mature, leading to a net supply of $500 billion being repaid. Additionally, a large influx of cash provided by government-sponsored enterprises will flow into the market in the coming days.