Guotai Haitong: Will US dollar liquidity become the core contradiction?

Guotai Haitong released a research report stating that since late October, SOFR has consistently exceeded IORB, and combined with the Fed restarting rate hikes, market concerns about US dollar liquidity have intensified. Tracing fund flows from onshore to offshore to the real economy, the firm believes that US dollar liquidity has not yet become the core contradiction affecting asset pricing, but the marginal tightening deserves attention. Currently, onshore US dollar liquidity pressure is concentrated in the repo market, while interbank conditions remain stable; offshore US dollar supply is ample; transmission to the real economy is diverging, with commercial paper and loans continuing to expand while corporate bond issuance contracts, with pressure concentrated in low-rated issuers such as CCC-rated companies. Around year-end, attention should be paid to whether repo market pressure spreads to the interbank market, and whether credit pressure in bond market issuance spreads to higher ratings. Guotai Haitong's main views are as follows: Onshore liquidity: The repo market comes under pressure first, while the interbank market remains stable. Rate hikes shift the entire interest rate corridor upward, and judging whether interbank liquidity is tightening requires looking at where market rates sit within the corridor. Since October 23, SOFR has consistently exceeded IORB, with all three spreadsSOFRIORB, SOFRON RRP, and SOFREFFRat percentiles above 90% since November 2021. Idle funds parked by money market funds at ON RRP have been essentially depleted, and the repo market has begun relying on bank reserves. The interbank market remains stable, with EFFRIORB holding at -2bp and reserves at 11.2% of total bank assets, still in the ample range. Looking ahead, TGA will rise to approximately US$1.025 trillion in late November and late January next year, and combined with year-end balance sheet compression by banks, if SOFRIORB persistently exceeds 10bp or the SOFR tail widens significantly, pressure could spread from the repo market to the interbank market. Offshore liquidity: Cross-currency basis is narrow, and offshore US dollar supply is ample. The 3-month euro basis is -2.1bp, essentially near zero, indicating ample US dollar liquidity in European markets; the yen basis has long been below the euro basis because Japanese life insurers, banks, and other institutions hold large amounts of US dollar assets and hedge FX risk through FX swaps, creating persistent one-sided demand for swap dollars. The yen basis has widened somewhat compared with September but remains better than the median since 2021. Transmission to the real economy: Financing costs have risen, financing scale has diverged by channel, and financing pressure on low-rated corporates has increased. Looking at the three channelscommercial paper, bank loans, and corporate bondsfrom lowest to highest cost, financing costs have risen after rate hikes, but scale growth has diverged: commercial paper balances grew 13.7% year-on-year and commercial and industrial loans grew 11.5% year-on-year, indicating that short-term financing and credit channels remain open and corroborating the resilience of the US economy; corporate bond issuance, however, contracted markedly after rate hikes, with investment-grade and high-yield issuance falling 20% and 12% year-on-year in SeptemberOctober, respectively. Current pressure is concentrated at the weaker end of credit: the CCC-rated spread has risen to 13.20%, exceeding the peak during the April 2025 reciprocal tariff shock, and high-yield issuance fell 34% year-on-year in October, with low-rated corporates weakening in both volume and price. If pressure spreads from CCC to B and BB rated issuers, financing conditions will tighten broadly starting from the tail. Overseas economy: Crude oil plunged, US manufacturing sentiment strengthened Global assets: Crude oil plunged, gold and Hong Kong stocks led gains. Expectations for US-Iran peace talks intensified, and Brent crude fell 16.7% for the week; gold and the Hang Seng Index both rose about 5%, while the Nikkei 225 fell 9.3%; the 10-year US Treasury yield declined 8bp. US economy: Manufacturing strengthened, household confidence subdued. The October ISM manufacturing PMI rose to 55.5, but the prices sub-index remained high; the preliminary November University of Michigan consumer sentiment index fell to 42.8, and inflation expectations eased somewhat. Risk warnings: Fed monetary policy more hawkish than expected; credit risk among low-rated corporates spreading more than expected; geopolitical uncertainty greater than expected.