Rates on collateralized loans in the market for borrowing and lending Treasuries are above the average for the past year after jumping to the highest level since 2008 after Hurricane Sandy forced markets to close.
The overnight general collateral repurchase rate, the cost to borrow Treasuries for cash for one day, was at 0.324 today, nearly double the 0.186 average since November 2011. It reached 0.729 percent on Oct. 29, the most in four years, after trading volumes slowed as the Securities Industry and Financial Markets Association recommended that dealing in dollar-denominated fixed-income securities end early that day and be canceled on Oct. 30. American stock markets closed for both days in the longest weather-related shutdown in more than a century.
Sandy, the Atlantic’s largest-recorded tropical storm, slammed into the East Coast Oct. 29, emptying the streets of some of the nation’s largest cities and lashing a region of 60 million with gales and rain. The storm, 900 miles across, may cause as much as $50 billion in economic damage, according to Eqecat Inc., a risk-management company in Oakland, California.
“Whenever you are in a stressful situation, people’s goals are just to make sure they get their firm financed, and they don’t worry as much about every basis point,” said Michael Cloherty, head of U.S. interest-rate strategy in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 firms that trade directly with the Federal Reserve. “In times of stress and illiquidity like this week, people pay a little more than they normally would just to make sure they complete their financing.”
The average overnight Treasury general collateral repo rate this year through Oct. 26, the last trading day before Sandy struck, was 0.20 percent, according to ICAP Plc, the world’s largest interdealer broker.
Securities dealers use repos to finance holdings and increase leverage. The agreements are a form of collateralized loan, in which one party offers a security as collateral for a cash loan.
“People were scrambling from the effects of Sandy as the market was extremely illiquid, and now they are scrambling to get back to normal,” said Joseph Abate, money-market strategist in New York at Barclays Plc, another primary dealer. “But the displacement was just a blip, and by next week when things are restored and the power everywhere is back on, the general collateral rate should be back near the recent range of 0.25 to 0.28 percent.”
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