SINGAPORE - Demand for dollar funding picked up momentum on Monday as deepening risk aversion rattled the global financial market.
The spread between two-year US overnight-indexed swaps and cash Treasury yields, a proxy for demand for the world’s reserve currency, narrowed to the lowest since November. Another measure, three-month yen-dollar basis swaps, slid to levels unseen since December, while equivalents in the euro and pound saw similar declines.
Still, the moves were modest and not at levels that would signify heightened concern about market stability.
Investors are looking to money markets to gauge the level of financial stress and potential impact on interest rates from the risk-asset selloff triggered by President Donald Trump’s global tariff policy. With his administration showing no sign of backing down and China set to retaliate, swaps price in a total of more than 100 basis points of rate cuts by the Federal Reserve by year-end.
“We may be seeing a repeat of what happened during the global pandemic albeit a smaller scale where investors, businesses and companies dashed for dollar funds, leading to a drop in liquidity in the Treasury market,” said Naokazu Koshimizu, a senior rates strategist at Nomura Securities Co. in Tokyo.
“While swaps have dropped substantially to reflect expectations of rate cuts, investors and dealers find it difficult to buy bonds,” preventing Treasury yields from matching the move.
Should higher US tariffs take effect on April 9 as announced, demand for dollar funding risks strengthening further unless the Fed takes measures such as supplying funds or cutting rates, according to Koshimizu.
Spreads in the spot and forward currency market also showed signs of modest widening, albeit not at levels that significantly impacted transactions, according to an Asia-based FX trader who asked not to be identified they aren’t authorized to speak publicly.
