WSJ on Pressure in Repo Markets
Friday's Wall Street Journal featured "Pressure in Repo Market Spreads", which claimed, "A shortage of high-quality bonds is disrupting the $2.6 trillion U.S. market for short-term loans known as repurchase agreements, or "repos," creating bottlenecks for a key source of liquidity in the financial system and sending ripples through short-term debt markets. Stresses in the repo market are amplifying price swings in government bonds and related debt markets at a time when many investors are reshuffling their portfolios around new interest-rate expectations, following a period of low volatility, traders and analysts said. Although traders said the impact so far has been manageable, the broad concern is that scarcity in repos will pressure rates and could complicate efforts by the Federal Reserve to lift interest rates when the time comes. Problems in the repo markets have been the subject of discussions at the U.S. Treasury, people familiar with the matter said. Since there is typically a strong relationship between repos and overall bond markets, the shifts can influence trading in everything from U.S. Treasurys to commercial paper, short-term IOUs taken on by companies." It added, "Firms clamoring for the bonds include banks that are required under new rules to hold high-quality assets for liquidity purposes, the $2.67 trillion money-market-fund industry that is limited to high-quality debt maturing in less than 13 months and hedge funds that require specific securities to settle certain bets and cannot accept substitutes. Money-market funds take comfort in repos because the trades are secured by bonds. When they can't find their first-choice trades in the repo markets, they look to the next best thing in the open market, dragging down yields on Treasury bills, commercial paper and other short-term debt."
