Strategists on Quarter-End "Mess"
Both Citi Money Market Strategist Andrew Hollenhorst and RBC Capital Markets Strategist Michael Cloherty commented on quarter-end distortions in repo and money market rates late last week. Hollenhorst's latest "Short End Notes," says, "Quarter-end dislocations in money market rates have become more pronounced in recent years and Q1 2016 is no exception. 3m T-bill rates fell from 22.4bp to 19.8bp, interdealer repo rates spiked from 43bp to 64bp and fed funds effective dipped to 25bp from a stable average of 37bp. The factors driving month-end and quarter-end volatility are structural and we expect this to continue going forward.... Large movements in the price of front-end securities are driven by supply-demand imbalances at month and quarter-ends. As quarter-end approaches banks look to reduce the size of their balance sheets. That means taking certificates of deposit (CDs) and commercial paper (CP) that money funds (MMF) and other short end investors purchase out of the market. Investors are left scrambling to find alternatives for parking their cash over quarter-end." He continues, "For MMF the ultimate resting place for excess cash is now the Fed's reverse repo facility (RRP).... We have found watching flows into this facility slightly ahead of quarter-end gives some indication of the severity of the cash supply-demand imbalance and hence of the dislocations to be expected in short-end markets. For instance, in the days leading up to this quarter-end RRP usage increased from around $40 billion to $127 billion before spiking to $304 billion on quarter-end itself." RBC's Cloherty states in an e-mail brief, "Are there lessons to be learned by the combination of GCF RP averaging 64bps yesterday (with some trades well north of that) at the same time that $304bn of cash went into the RRP at 25bp? Think all it meant is that people got a bit overconfident about quarter-end balance sheet availability, thinking the Q3 and Q4 crunches on dealer sheets were just due to the GSIB buffer date on Sep 30 and year end, and had to scramble when sheet was hard to find. In the wake of yesterday everyone is going to expect every single quarter end to be a mess, with even greater fear in at the end of Q3 and Q4. So investors are likely to aggressively prepare ahead of time, meaning the June 30 crunch is unlikely to be as bad as yesterday's squeeze. Think it also suggests that market depth is going to be minimal around quarter ends. As long as there is little selling, it won't matter (which is what we had this month). But if there is a reasonable amount of selling into quarter end, dealer balance sheets won't be able to absorb it and prices are likely to move significantly." Finally, see WSJ's "Cash Squeeze Fuels Repo Rate Surge"."
