Hill Says Spike in Repo Technical
"Spike in repo rate a technical event" writes Federated Investors' Sue Hill. She explains, "When rates on the typically steady overnight repurchase agreements behave like the stock market, as they did yesterday and this morning, even the broad market pays attention. But despite the flashing red lights, this increase in short-term rates is being driven by technical factors rather than credit concerns. A confluence of factors, chiefly the deadline for corporate quarterly tax payments and the settlement of $54 billion of net new U.S. Treasury supply, led to funding pressures over the past few trading sessions. That pushed rates on repo transactions with Treasury and agency collateral to an eye-popping 5% today for the general collateral type of trades done by money market funds. The volatility has been furthered by reserve balances at the Fed that have declined to a level that may make it more difficult for the Fed to maintain control over the level of short-term interest rates." She adds, "This event is unusual, but the surge -- and the resulting increase in yields on certain money funds -- is not a credit-driven event. The Fed acted quickly this morning to address this perceived reserve shortage through operations in the market that provide liquidity, and may announce new tools at the Federal Open Market Committee (FOMC) meeting ... to address the market dislocation. In a separate action, we also expect the FOMC to lower the fed funds target range to 1.75% to 2%." J.P. Morgan Securities' Alex Roever also commented on the spike yesterday, in a brief entitled, "Repo: What just happened?" He writes, "US funding markets were shocked this week as a combination of factors reduced the amount of cash available to fund securities positions. Repo rates surged in response, prompting the Fed to inject liquidity via an open market operation. A combination of factors have caused the securities financing markets to grow by a third over the past year. Although they have generally become safer and more diverse in recent years, they remain susceptible to temporary mismatches in the demand for funding and the availability of cash." Finally, see the Wall Street Journal's update, "Fed Intervenes to Curb Soaring Short-Term Borrowing Costs."
