(Bloomberg) — The cost of overnight borrowing in Hong Kong jumped past 5% for the first time this year, as cash conditions tightened further on quarter-end demand and an upcoming holiday.
The overnight Hong Kong Interbank Offered Rate jumped 130 basis points to 5.018% on Tuesday, the highest since December. That takes the total rise in the three months ended September to nearly 500 basis points, the most on record in Bloomberg data going back to 2006.
The latest spike in borrowing costs reflects heightened demand for cash as banks prepare for regulatory balance sheet checks at the end of the quarter. The demand for funds is also high ahead of the National Day holiday on Wednesday.
“Banks are keen to acquire deposits and loans around the quarter end for financial reporting,” said Ryan Lam, head of research at Shanghai Commercial Bank Ltd. in Hong Kong. “Money traders might take foot off the gas pedal to feel the liquidity of the market around the quarter end.”
Cash conditions in Hong Kong have been tight going into the end of the quarter as liquidity drainage by the city’s monetary authority to defend its currency peg pushed up local interest rates, making the market more sensitive to seasonal funding pressures.
The Hong Kong Monetary Authority has bought the local dollar in its slew of interventions to keep the currency boxed in a 7.75-7.85 per greenback trading range. That shrank the aggregate balance — banks’ cash held with the central bank — by about 70% since May to around HK$54 billion.
This year’s rally in Hong Kong stocks has also influenced local funding costs. The equity gains are attracting money from mainland investors, who need to buy the local currency to finance their purchases.
Borrowing costs had eased slightly as Super Typhoon Ragasa lashed the city last week, forcing Zijin Gold International Co. to delay a $3.2 billion initial public offering.
One-week Hibor dipped two basis points to 4.18% on Tuesday, but remained above the longer one-month tenor.
“The inversion shows despite the passing of super Typhoon Ragasa, HKD funding is expected to remain tight towards quarter-end and will only moderate by the end of October,” Chun Him Cheung, a strategist at Bank of America, wrote in a research note on Monday.
“When the aggregate balance is reduced, this marginal decline in cash lending can result in a pronounced funding squeeze.”
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