SOFR tension persists

The silent tension in the financial system continues, even after the rate cut from the Fed on Wednesday. In the chart below, you can see the time evolution of the difference between SOFR, the rate at which banks lend to each other, and IORB, the rate at which the Fed pays bala on reserves. With the cut, IORB went down, and in a normal market, that should pull from SOFR down too, but not in today’s environment. SOFR remains elevated and if this tension continues, th Fed might be forced to intervene. On Wednesday, Powell announced the end of theFed’s balance sheet runoff (end of QT), explaining that the Fed will invest the runoff from mortgages into Treasury bills. Even though they will never call this QE, because bills are short duration instruments, the reality is that they will be injecting liquidity in the system, with the goal of unclogging the short term financial pipes. The question is if the runoff money will be enough to do the job. If SOFR does not come down pretty soon, the Fed will be forced to inject more money into the system, to avoid opening the door for more credit cockroaches to pop up.

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Chart source: Zerohedge