the hibor–sofr gap
The difference between the two rates, what makes it open and close, and why it decides the cost of funding and hedging a Hong Kong position.
concept note · live rateswhy the gap exists at all
If HKD is pegged to USD, why aren't HKD and USD interest rates identical? Because the peg is a band, not a single point, and moving money across it takes time. Over the long run the two rates must stay close. In the short run the gap reflects how much spare HKD is sloshing around.
USD and HKD are two pools. Water (money) flows toward the pool where it earns more. Inside the band nothing stops it, so if HKD pays less, people borrow HKD, swap it into USD and earn the difference. That is the carry trade.
Every trader doing it sells HKD, which pushes USD/HKD toward 7.85. When it arrives, the HKMA's gate opens: it buys HKD, the HKD pool drains, HIBOR rises and the gap closes. The gap pays you until the gate opens, then it stops paying.
hibor against sofr
Three years, daily.
how to read it: when the blue line sits under the orange one, HKD is the cheaper currency to borrow, and the pressure is toward the weak side of the peg.
the gap itself, in basis points
Negative = HKD cheaper than USD.
how to read it: the deepest point was mid-2025, when HKD liquidity flooded in and the gap went below −350bp. A carry trade at that level paid well, until the peg reached 7.85 and the HKMA drained the liquidity away.
usd/hkd inside its band
Dashed lines are the HKMA's convertibility undertakings.
how to read it: compare with the gap above. Deeply negative gaps push the line to the top (weak side), because carry traders are selling HKD. It's the pools analogy, drawn.
Source: ECB reference rates via Frankfurter; HKMA for the band.
worked example: what hedging hkd costs a usd investor
A USD-based fund owns Hong Kong stocks and wants to remove the currency risk. It sells HKD three months forward. Covered interest parity says the forward rate must reflect the interest-rate gap.
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the inputsspot 7.8452 · HIBOR 3M 3.020% (ACT/365) · SOFR 90-day avg 3.646% (ACT/360) · 91 days
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parity forwardF = S × (1 + rHKD × 91/365) ÷ (1 + rUSD × 91/360) = 7.8452 × 1.00753 ÷ 1.00922F ≈ 7.8321, forward points ≈ −131 pips
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what that meansThe fund locks in fewer HKD per USD than spot, so hedging earns about 63bp a year: roughly SOFR minus HIBOR. When HIBOR is below SOFR, the hedge pays you to hold it.
Parity forward from published fixings, not a dealer quote. Real forwards also include a cross-currency basis, set by demand for dollar funding, which can push the real forward either side of parity.
what the gap does to different trades
| Trade | When HIBOR < SOFR | When HIBOR > SOFR |
|---|---|---|
| Long HK stocks, HKD-funded swap | cheaper to carry than USD funding | dearer to carry |
| Short HK stocks | less interest earned on short cash | more interest earned on short cash |
| USD investor hedging HKD exposure | the forward hedge earns carry | the forward hedge costs carry |
| HKD carry trade (borrow HKD, hold USD) | profitable, until the weak side is hit | doesn't work; money flows the other way |
| Choosing the funding currency for a cross-border book | fund in HKD where you can | fund in USD where you can |
Parity assumes you can move money freely at the published rates. In a squeeze, banks hoard HKD, the forward market adds a premium, and quoted HIBOR can lag what's actually tradable. The peg has also held since 1983, but a hedge that only works while the peg holds is a bet on the peg.
- HIBOR − SOFR is the price difference between the two pools of money.
- A negative gap draws in the carry trade, pushes USD/HKD toward 7.85, and eventually corrects itself.
- For a USD investor, hedging HKD earns about SOFR − HIBOR a year.
- It decides which currency is cheaper to fund a Hong Kong equity book in.