Liquidity Watch: Houston, we have a liquidity/SOFR problem!
We've seen a significant spike in SOFR-EFFR spreads over the past 48 hours, which feels reminiscent of September 2019, though on a smaller scale. The Fed may be facing a liquidity problem.
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Welcome to this liquidity watch analysis, where we will address the current stress in USD funding markets and the potential impact on the Fed’s reaction function.
Our best guess is that the current situation will serve as a reason for the Fed to alter the liquidity path significantly in the coming months. Here is a list of the key details you need to pay attention to.
We will answer the following three questions:
1) What’s going on in SOFR rates and is it linked to liquidity stre
ss?
2) What are the lessons learned from the September 2019 liquidity stress?
3) How will the Fed address this in the coming weeks and months?
What’s Going on in SOFR Rates and Is It Linked to Liquidity Stress?
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