The FT writes "Carry traders feel effect of rising US short-term rates". The article says, "The US Federal Reserve keeps saying rates will remain low for an extended period, but it is a message the money market is not buying. Short-term US rates have been edging higher amid volatile swings in recent weeks, and they have room to rise further, say analysts. That increases the cost for investors and institutions implementing carry trades, whereby the purchase of higher-yielding assets is financed by short-term borrowing.... The rise in general collateral, used in the repurchase or repo market for Treasury debt, has been accompanied by higher rates for other key short-term rates, such as three-month Libor, commercial paper, Treasury bills and notably, the effective Fed funds rate." The FT quotes Nomura's George Goncalves, "We now have some friction in the funding markets and Fed funds competes with repo, so it is being dragged higher." The piece adds, "The rise in short-term rates began when the US Treasury resumed selling short-term bills in February, and the issuance of up to $200bn of Supplementary Financing Bills, has created a bout of indigestion for the repo market. Also weighing on funding rates, has been an uptick in the sale of discount notes by the US housing enterprises, Fannie Mae and Freddie Mac. Meanwhile, traders are focused on the Fed increasing its other main short term interest rate, the discount rate." FT quotes Chris Ahrens from UBS, "The Fed effective rate, as well as three-month Libor, appear to be becoming more responsive to the potential for an upside move in rates."
