Bloomberg on Year End Repo Spike
Bloomberg writes in "Year-End Money-Markets Angst on Fed Exit Echoes 2018 Crunch." They explain, "The Federal Reserve's continued push to remove liquidity from the financial system is bringing back volatility to year-end trading in the overnight funding markets for the first time in five years. Volatility in the market for overnight repurchase agreements is generally tame, but it has started to move, with repos trading as high as 5.53% before closing at 5.32% on Tuesday, according to Curvature Securities. The last time the repo market moved at all around year-end was in 2018 when it spiked more than 3 percentage points to 6%. The move comes as the Secured Overnight Financing Rate rose to the highest level in more than three weeks through Tuesday, which is just shy of the all-time high reached on Dec. 1. Usage of the Fed's reverse repo facility, where counterparties can park cash overnight, is expected to rise further in coming days." The article explains, "Here's what to watch for further signs of funding strains in the coming days: ... The Secured Overnight Financing Rate, or SOFR, is a reference rate connected to transactions of overnight repurchase agreements. When funding costs rise it tends to drive SOFR higher as well. SOFR fixed at 5.35% as of Dec. 26 from 5.32% the prior session, according to New York Fed data published Wednesday. That's off the all-time high of 5.39% reached on Dec. 1.... The Fed's reverse repo facility, or RRP, has been a place where counterparties -- mostly money-market mutual funds -- can park excess cash to earn a market rate, currently 5.3%. As banks pare their repo market activity to tidy up their balance sheets, it spurs money funds to shift more cash to the RRP. On Wednesday, 90 counterparties parked $819 billion at the facility, the most since Dec. 13.... With year-end balance sheet constraints and an increased need to finance long Treasury positions in the cash market, banks are shifting more activity to sponsored repo. Total sponsored repo activity has risen, even reaching an all-time high of $1.031 trillion as of Dec. 22, Depository Trust & Clearing Corp. data show. That's because sponsored repo transactions allow lenders to transact with counterparties like money-market funds and hedge funds, without bumping up against regulatory constraints of their balance sheets. These agreements are effectively 'sponsored' or cleared via the Fixed Income Clearing Corp's repo platform, thereby allowing dealer banks to net two sides of a trade and hold less capital against it."
