On Monday, a vital overnight funding rate in the U.S. saw a significant increase, reflecting tighter liquidity conditions in money markets as the month and the third quarter draw to a close.
The Secured Overnight Financing Rate (SOFR), which indicates the cost of borrowing funds overnight with Treasury securities as collateral, climbed to 4.96% on Monday, an increase from 4.84% at the end of the previous week, according to data released by the Federal Reserve Bank of New York on Tuesday.
Discounting changes related to Fed policy rate adjustments, the SOFR spike on Monday marked the largest one-day increase since March 2020, as per the data.
The rate surged six basis points (bps) above the interest paid on reserve balances (IORB) by the Fed to banks, indicating funding concerns.
In parallel, the DTCC GCF Treasury Repo Index, which monitors the average daily interest rate for the most widely traded General Collateral Finance (GCF) repo contracts involving U.S. Treasuries, ascended to 5.221% on Monday, about 32 bps above IORB.
Angelo Manolatos, a macro strategist at Wells Fargo in New York, mentioned in a note that the “fluctuations in repo markets” indicated increased funding pressure.
A rise in repurchase agreement prices can signal diminishing cash availability in a crucial market for Wall Street funding. Funding costs in the short-term surged in September 2019 due to a significant reduction in bank reserves linked to a corporate tax deadline and hikes in net Treasury issuance, prompting the Fed to step in and inject liquidity into the repo markets.
As Beijing implement various stimulus measures including lower rates and initiatives to aid the struggling property sector, Chinese stocks achieved their most robust weekly performance since 1996, with real estate shares soaring by a third.
China’s considerable economic stimulus has also contributed to the largest quarterly increase in both emerging market stocks and primary global volatility indicators since 2022.
“China’s recovery is essential for a rebound in the asset class,” stated Claus Born, an emerging markets equity portfolio manager at Franklin Templeton. “The significance of China’s role is paramount.”
“It’s typical for repo rates to increase at the end of quarters due to balance sheet reporting prompting dealers to limit their matched book activities,” remarked Joseph Abate, an interest rates strategist at Barclays, in a note on Tuesday.
Nonetheless, he noted that the swift rise in borrowing rates on Monday suggested that banks’ balance sheet capacity was “far less available than anticipated and considerably dearer.”
On the same day, the standing repo facility (SRF), which permits qualified entities to exchange Treasuries or other securities with the Fed for cash, recorded $2.6 billion in lending from the U.S. central bank. This marked the first instance of daily lending surpassing $200 million since the facility’s inception in 2021.
The daily cap for SRF lending stands at $500 billion currently.
Data revealed that the Fed loaned $250 million against mortgage-backed securities collateral and $2.35 billion against Treasury collateral. Most of the Treasury borrowing occurred at a rate of 5.01%, exceeding the minimum bid rate of 5.00%. The Fed recorded high and low rates of 5.01% and 5.00%, respectively, with a weighted average of 5.007%.
Lou Crandall, chief economist at money market research organization Wrightson, noted that merely $2.6 billion of collateral was financed through the Fed at rates close to 5.00%, on a day when other repo rates provided Treasury collateral at higher rates.
For instance, Wrightson reported that $94 billion of Treasury GCF repo was processed at an average rate of 5.22% in the market, and $74 billion of MBS collateral financed at an average of 5.45%.
“This does not indicate an effective ‘ceiling’ tool,” Crandall remarked, referencing the SRF. “However, it was a positive initiation…as at least one or more institutions were indeed willing to utilize the facility for a change.”
On Tuesday, the SRF reported no volume, indicating that Monday’s surge in activity was attributed to month-end pressures.
