PIMCO writes, "Repo Rate Spike: A 'Tail' of Low Liquidity." They say, "Banks' 'reporting' dates are known inflection points in the short-term funding markets and typically fall at the end of the month, quarter, and of course the year. But periodically, the 15th of the month is also a pressure point. Such was the case this past Monday when a short-term funding rate that had been hovering around 2.21% soared as high as 10%." The post explains, "The funding market succumbed to a trifecta of pressures: Payments on corporate taxes were due on 15 September, leading to high redemptions of more than $35 billion in money market funds; Cash balances increased by an additional $83 billion in the U.S. Treasury general account, which reduces excess reserves and simultaneously acts to reduce the aggregate supply of overnight liquidity available in funding markets; [and] Dealers needed an additional $20 billion in funding to finance the settlement of recent scheduled U.S. Treasury issuance.... None of these pressures was extraordinary or unforeseen, but together they had an extraordinary impact." PIMCO's piece continues, "We expect these episodes of funding stresses to become more frequent with demand for funding and U.S. Treasury supply forecast to increase heading into year-end and the Fed's reserve levels likely to drop further. Over the past two years as the Fed has undertaken 'quantitative tightening,' its reserves have declined to $1.4 trillion from $2.3 trillion in August 2017. Meanwhile, since June 2018, banks' holdings of U.S. Treasuries have more than doubled to over $200 billion from $100 billion. These holdings have been financed by money market funds which have increased their repo investments by over $300 billion this year alone, based on data from the Investment Company Institute." The article adds, "We think investors should be prepared for deteriorating liquidity in the funding markets into year-end and the impact of this on the financial markets as a whole, with potential costs for levered strategies and risk assets in particular.... From a broader investment perspective, market participants who have excess cash and can provide liquidity to the short-term funding markets may benefit.... As the past few days have shown, current market liquidity conditions warrant defensive positioning overall but can also present opportunities for investors who are in a position to take them."

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