US Short-Term Rate Jumps to Year High as Funding Strains Grow

Core Insights - A key interest rate in the US financial system has surged to its highest level this year, surpassing the Federal Reserve's target range due to reduced liquidity, influenced by Treasury auction settlements and corporate tax payments [1][2]. Group 1: Interest Rate Movements - The Secured Overnight Financing Rate (SOFR) increased to 4.51% as of September 15, up from 4.42% the previous session, marking the largest rise since December 31 [2]. - The spread between SOFR and the effective fed funds rate widened to 18 basis points, the largest since December 26, with the fed funds rate at 4.40% as of September 12 [4]. Group 2: Market Conditions - Overnight financing rates for banks and asset managers have been rising as the Treasury rebuilds its cash reserves while the Federal Reserve reduces its balance sheet [3]. - Usage of the Fed's overnight lending facility has dropped to a four-year low, indicating a tightening liquidity environment [3]. Group 3: Federal Reserve Actions - The Federal Reserve has been unwinding its balance sheet since 2022 to reverse asset purchases made during the pandemic, aiming to minimize bank reserves at the central bank [6]. - Persistently high overnight rates may challenge the Fed's ability to continue its quantitative tightening without impacting liquidity in the financial system [5].