Overnight Repo Rates Fall to 2011 Low as Quarter End Adds to Shortage
Rates for borrowing and lending securities in the repurchase-agreement market slipped to the lowest level this year as banks shored up balance sheets at quarter-end amid already short supply.
The average level of overnight general collateral repo rates traded through 10 a.m. New York time with ICAP Plc, the world’s largest inter-dealer broker, was 0.01 percent yesterday. That matched the lowest level this year and was down from 0.12 percent at the start of the quarter. The repo rate opened today at 0.02 percent. The average rate for overnight federal funds, known as the fed effective rate, averaged 0.09 percent this quarter, which compares with the central bank’s target rate for overnight loans between banks of zero to 0.25 percent.
The U.S. budget stalemate and the Federal Reserve’s debt purchases have reduced the amount of Treasuries available for borrowing and lending in the repo market. The Fed will complete today its $600 billion of Treasury purchases under the second round of quantitative easing, known as QE2. In February, the Treasury eliminated $195 billion in Supplementary Financing Program bills, or SFPs, it sold on behalf of the Fed as it sought to help avoid exceeding the U.S. debt limit.
“The combination of a lack of Treasury supply, quarter-end demand and a flight to quality has driven repo rates lower,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “The typical rebound that occurs after quarter-end might not be as much as usual this time as there will still be flight-to-quality demand given the issues in the euro zone and a shortage of supply as the debt ceiling hasn’t yet been raised.”
Investors such as banks and securities firms are often attracted to the safest securities and shortest maturities at quarter-end to improve the quality of assets on their balance sheets.
Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate are called general collateral. Those in highest demand have lower rates and are called “special.”
President Barack Obama is working to reach a compromise with Republican lawmakers, who are seeking spending cuts before they agree to raise the nation’s borrowing limit. The government has said the U.S. can borrow until Aug. 2 after reaching the $14.3 trillion limit.
The average rate for borrowing and lending Treasuries for one day in the repo market was minus 0.005 percent yesterday, according to index data provided by the Depository Trust & Clearing Corp. That was the first time the index was negative. The DTCC provides data back through July 2010 on its website. The rate was 0.101 percent at the start of the quarter.
The DTCC index is a weighted average of all general collateral repo transactions during a day. The DTCC processes about $3.6 trillion in repos transactions daily.
An apparent increase in demand for Treasury repos from U.S. prime money market funds moving investments out of euro commercial paper and certificates of deposits because of the euro-zone debt crisis has also helped drive repo rates lower, according to the Boca Raton, Florida-based broker dealer AVM LP.
“Uncertainty in the overall stock market is also driving cash to the front end of the fixed income markets as well as into repo,” said Jeff Kidwell, director of funding and direct repo at AVM. “Once quarter-end is over, we expect general collateral repo rates to rise, particularly as the Greek austerity measures just passed in the government vote and if the debt ceiling is resolved, likely bringing back $195 billion in SFP bills.”
The 10 largest U.S. prime money market funds, representing $755 billion of total assets, have about 50 percent invested in securities issued by European banks, Fitch Ratings estimated in a June 21 report. Prime money funds typically invest in commercial paper, bank certificates of deposit and floating-rate notes issued by private firms.
The Standard & Poor’s 500 Index has fallen 2.8 percent in June on the European debt crisis and weaker-than-expected economic data in a second straight monthly loss.
Greek Prime Minister George Papandreou won a vote on an austerity package in Parliament yesterday. Papandreou may still struggle to convince investors that he can implement the $112 billion austerity plan as it reaches a final vote in parliament as public protests in the streets escalate.
The one-month Treasury bill rate traded negative this week for the first time since January 2010 in the cash market. It touched negative 0.0101 percent yesterday, according to Bloomberg Bond Trader prices. The rate is down from as high as 0.1562 percent this year on Jan. 10.
Negative bill rates mean investors are willing to pay the government to hold their money, protecting them from the potential losses of other investments.
“Prime money funds are monitoring the situation in Greece closely and actively managing their exposure to euro-zone banks,” said Alex Roever, head of short-term fixed-income strategy at JPMorgan Chase & Co. in New York. “The most popular place so far to reinvest has been in repo, which has contributed to the plummet in overnight general collateral rates. We should begin to see some modest relief after the Fed’s QE2 ends.”
Overnight general collateral repo rates should increase by five basis points following the end of the Fed’s QE2 and should rise toward 17 basis points if the debt ceiling is raised, assuming also the resumption of the SFP bill issuance, according to JPMorgan.
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