Since 2021, the global inflationary pressure has become prominent, and the monetary policy positions of major economies have been tightened and divided. On March 17, 2022 Beijing time, the Federal Reserve raised the target range of the federal funds rate by 25 basis points to 0.25% - 0.5%, opening a new round of interest rate hike cycle. Most Fed officials believe that the federal funds rate will rise to 1.875% by the end of 2022. As the wind vane of global monetary policy, the Fed's interest rate hike will tighten global liquidity, and its spillover effect deserves high attention.
First, offshore dollar liquidity tightened. The US dollar offshore market is at the bottom of the global US dollar liquidity and is vulnerable to the external market environment and the adjustment of the Fed's monetary policy position. Before the Fed raised interest rates, offshore dollar liquidity showed a tightening trend. As of March 16, 2022, Ted's interest margin was 0.51%, an increase of 35.9 basis points over the end of 2021; The spread between the three-month LIBOR of the US dollar and the overnight interest rate swap (OIS) was 0.45%, an increase of 32.7 basis points over the end of 2021. The sharp rise of the two types of interest rate spreads is due to both the tightening of offshore dollar liquidity and the rise of bank credit premium. In addition, the swap spread between the US dollar and some currencies also showed an upward trend. The swap spread between the RMB and the US dollar rose from 27 basis points in early 2022 to 70 basis points on March 15; The quotation of Euro dollar currency swap increased from 127 basis points at the beginning of 2022 to 223 basis points on March 17. The increase of currency swap spread means that the use of relevant currencies for cash flow exchange with the US dollar needs to pay higher costs, reflecting the increase of US dollar financing costs. In comparison, the US domestic market has abundant liquidity and the trend of interest rate is relatively stable. Before the interest rate increase, the dollar secured overnight financing rate (sofr) and the dollar bank overnight financing rate (obfr) remained low. After the interest rate hike, its interest rate rise is equivalent to that of the federal funds rate.
Second, cross-border capital flows back to the United States. From the previous interest rate increase cycles of the Federal Reserve, the characteristics of cross-border capital returning to the United States are more prominent. From the perspective of capital flowing abroad, the outflow of funds is mainly concentrated in portfolio investment and other investments. The outflow of funds will aggravate the fluctuation of local stock market and bond market, and also increase the difficulty of foreign currency financing of most economic entities. After the funds return to the United States, they mainly flow into the U.S. capital market (especially the U.S. Treasury bond market), and some provide credit support to the U.S. physical sector. Since the first quarter of 2022, seven of the top 10 foreign investors in US Treasury bonds have increased their holdings of US Treasury bonds by nearly US $100 billion. The global stock market shock was seen around the Fed's interest rate hike, and the European, Chinese mainland and Hongkong China stock markets showed signs of capital outflow at the stage.
Third, the risk of currency mismatch in some emerging economies deserves attention. In recent years, although the share of foreign currency debt of emerging economies has declined, the risk of structural mismatch remains prominent. At the end of 2020, foreign currency debt of Argentina, Ukraine and Turkey accounted for more than 50%. From 2022 to 2023, emerging economies will face a peak in debt repayment. Among them, the proportion of foreign currency debts due within one year in Turkey and Argentina exceeded 50%. Under the background of the Fed raising interest rates and tightening global liquidity, the external debt risk of some emerging economies deserves attention.
Fourth, the US dollar liquidity risk of some non US funded banks increased. For a long time, the mismatch between us dollar assets and liabilities of large non US funded international banks has been prominent, and US dollar liabilities can not match us dollar assets, showing the characteristics of net assets. In order to raise US dollar funds, large non US funded banks highly rely on wholesale financing, foreign exchange forward and currency swap, which increases the foreign currency liquidity risk of non US funded banks under the background of the Fed's interest rate increase. By the end of the second quarter of 2021, the cross-border US dollar assets of non US funded banks totaled US $13.3 trillion, and the cross-border US dollar liabilities were only US $11.4 trillion, with a net asset / asset ratio of 14.7%. Among them, the mismatch characteristics of dollar assets and liabilities of large European and Japanese banks are more prominent.
