Today there was a spike in money market rates (repo) not seen in a decade. The Federal Reserve did the first significant repurchase operation since 2008. According to analysts at Wells Fargo, the need for today’s operation will spur additional discussion on the need for a standing repurchase facility at the Fed.
Key Quotes:
“US money markets have been on a wild ride this week. We have been deluged with questions, and overnight Treasury general collateral (GC) repo at one point traded near 9% this morning. The Secured Overnight Financing Rate (SOFR), which is based off of Treasury repo rates, has followed suit, climbing 23 bps on Monday. This jump in secured overnight borrowing rates has put upward pressure on unsecured markets: the effective fed funds rate set at 2.25% yesterday, an 11 bps move from Friday and at the upper bound of the Fed’s 2.00%-2.25% target range. What is going on here? In our view, the lead driver relates to corporate tax payments.”
“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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