Repo Running Wild
|- The spike in money market rates this morning resulted in the Fed undertaking the first overnight repurchase operation of meaningful size since 2008. The need for today’s operation will spur additional discussion on the need for a standing repurchase facility at the Fed.
- The Sep. 15 corporate tax deadline is likely one of the key drivers of the move in money market rates this morning. The payment of corporate taxes contributed to the drain of reserves from the system of likely somewhere around $100 billion.
- On the other hand, mid-month settlements of Treasury coupon auctions brought $54 billion in net supply to the market yesterday. This is a particularly large day of settlements, but is indicative of a broader trend of a growing supply of Treasuries (used as collateral for repurchase agreements) in the market with a falling supply of cash in the form of bank reserves.
- We expect we could see similar pressures come month-end, perhaps not quite to the degree of the move witnessed this morning. Net T-bill issuance is expected to drop off from the rapid pace of weekly issuance over the past six weeks. However, settlements of coupon notes and bonds on Sep. 30 will be a similar $50 billion.
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