Bloomberg writes "Repo Market Chaos Signals Fed May Be Losing Control of Rates." The article says, "One of the key U.S. borrowing markets saw a massive surge Monday, a sign the Federal Reserve is having trouble controlling short-term interest rates. Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments, the rate on overnight repurchase agreements soared by as much as 248 basis points to 4.75%, the highest level since December, according to ICAP pricing. It came back down to 2.50%, still up 23 basis points for the day.... While the spike doesn't necessarily mean credit markets are seizing up or a financial calamity is imminent, it could hamper the Fed's ability to steer the economy. As the Federal Open Market Committee meets this week, this surge could force yet another tweak to the central bank's interest on excess reserves rate to help ensure its main tool for guiding the economy -- the fed funds rate -- stays within policy makers' preferred band." Bloomberg quotes Bank of America's Mark Cabana, "The Fed has lost control of funding." The piece adds, "A combination of factors are behind the latest drive higher, including the settlement of the mid-month Treasury coupon auctions that pushed more collateral into the repo market. At the same time, cash is leaving the funding space as corporations withdraw from banks and money-market funds to make their quarterly tax payment.... The drop-off in reserves and fund outflows are driving up funding rates and starting to spill into the fed funds market because repo's attractive yields can draw some lenders away from the unsecured market." BMO Capital Markets's Jon Hill comments, "Secured funding markets are clearly not functioning well."

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