The rate for borrowing and lending government debt surged Thursday to the highest since the financial crisis as banks reined in collateral lending to shore up balance sheets ahead of the quarter-end.
With fewer dealers borrowing cash and posting government debt as collateral, money funds — the key lenders of cash in the repurchase agreement market — gravitated to buying Treasury bills and parking cash with the Fed via their RRPs during quarter-end, driving overnight rates higher.
General collateral repo rates opened Thursday at 0.85 percent and reached 1.1 percent by 12 p.m. in New York, twice Wednesday’s close, according to ICAP Plc, the world’s largest inter-dealer broker. The average level of overnight general collateral repo traded with ICAP was 0.847 percent Thursday morning, the highest since October 2008. The one-month bill rate fell to 0.17 percent, down from 0.18 percent a day earlier and 0.20 percent Tuesday.
The extremes swings in short-term money market rates typically seen at quarter-end surfaced earlier than normal this month amid funding pressures following the U.K.’s decision to exit the European Union. Higher repo rates makes it more costly for dealers, which use the market as a key short-term funding tool, to finance positions and take on leverage.
“What we are seeing in repo is something we typically see at quarter-end with dealers paring back balance sheets,” said Mark Cabana, a New York-based interest-rate strategist at Bank of America Corp. “Repo rates have tended also to be quite high since the Brexit vote. They will settle back into a more typical range” in the days ahead.
Securities dealers use repo to finance investments and increase leverage. They typically involve the sale of U.S. government securities in exchange for cash, with the debt held as collateral for the loan. In a general collateral repo transaction, the lender of funds is willing to accept a variety of Treasury, mortgage-backed or agency collateral.
Usage of the Fed’s reverse repurchase agreements, a tool the central bank uses to engineer monetary policy changes, has been rising ahead of quarter-end. More cash lenders have invested in the Fed’s RRPs during the final days of the three-month period, when repo becomes more scarce. The Fed’s RRPs amounted to $143 billion on Wednesday, three times the daily average this quarter.
“The quarter-end spike in volume happens as investors would rather have the Fed as a counterparty,” said Scott Skyrm, New York-based managing director of fixed-income financing at Wedbush Securities Inc. “The more that is put into the Fed’s RRPs means less investors cash put into the repo market — which adds to funding pressures.”