NBP: Glapinski Says Terminal Rate Could Be 3%

• 3m HIBOR was set higher again overnight at 1.76%, up over 40bps from last week's lows as USD/HKD spot continues to press against the weak-side of the trading band (7.8455 printed overnight). The recovery in rates follows the sharp swing from the strong-side (7.75) to the weak side (7.85) of the band in May, and as HKMA's liquidity injections of ~HKD 130bln in early May begin to be re-absorbed. There remains considerable room for local rates to rise further to erase the May decline, however.
• We flagged last week that a building IPO pipeline would support tighter interbank liquidity and higher local rates, relieving pressure on the weak-side of the USD/HKD band. This week's reports that Hong Kong are looking to issue HKD infra and green bonds (as well as CNH, EUR and USD) in the near future add to this theme. Similarly, Barclays estimate dividend payments of $36bln this quarter - almost double that seen in Q2 of recent years, while HSBC estimate near $13bln in dividend payments were made last week alone, further supporting S/T HKD demand.
• As such, HKD's recent status as a local funding currency may be reversing. This poses unwind risks to recent rallies in TWD, KRW & IDR as the downtick in HIBOR proves short-lived, and the attractiveness of APAC FX carry trades fades. Higher local rates may also deter firms from hedging USD exposure via cheaper HKD in the near future, denting a recent driver of the upside in implied vol.

Figure 1: 3m HIBOR/SOFR Spread hit biggest discount on record through recent APAC FX vol

Laura Weiss at Punchbowl News reports on X that Senate Republicans will hold an all-conference meeting to discuss the 'One Big Beautiful' reconcilliation bill on Wednesday afternoon.

• Come as GOP leadership and President Donald Trump try to nudge wavering Senators to back the package on an accelerated timeline to get the final bill to Trump desk by July 4.
• The prevailing view on Capitol Hill is that Senate Majority Leader John Thune (R-SD) will make as few changes to the House-passed bill as possible. The primary focus for Thune and Trump is to keep conservatives, concerned about the debt, and moderates, concerned about Medicaid and IRA tax credits, onside for a final vote.
• Treasury Secretary Scott Bessent is expected to stress to lawmakers that Congress must demonstrate to markets it is on track to pass a debt-limit increase – included in the package - by mid-July.
• NYT reported this morning that the megabill could contribute to an "exodus" from US assets, noting that Wall Street is watching Section 899 in the House-passed bill, which “could push [foreign investors] to put their money elsewhere.”
• The Senate Armed Services Committee is expected to roll out their portion of the bill today. Environment and Public Works is likely to follow on Wednesday, Commerce on Thursday, and Banking on Friday. The Committee sessions are loosely scheduled from easiest to hardest, with Finance, the panel with jurisdiction over Medicaid, likely to be among the last to release text. 

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