Don’t Blame Greece as Volatility Surges in U.S. Money Markets

Negative Bill Rates

Treasury one-month bill rates were trading below zero while rates for borrowing and lending Treasuries surged as demand for the safest and most liquid securities rises at quarter end.

While Greece teetering on the verge of default damped appetites for riskier assets, heightened demand on final day of the quarter, combined with a decline in bill supply, pushed rates for maturities through October were close to or below zero. The cost to finance Treasuries rose to the highest since March as those in need of financing were forced to pay higher prices.

“Quarter-ends are like a year-ends now,” said Scott Skyrm, New York-based managing director at Wedbush Securities Inc., “The normal effects are more exacerbated, with much more volatility in money-market rates. This is window dressing, with banks wanting their balance sheets to look smaller, have less leverage and have few securities, given” regulatory pressures.

The Treasury’s four-week bill rates dropped as low as negative 0.0203 percent Tuesday, after ending the day Monday at negative 0.1502 percent.

Treasury bills outstanding as a share of the government’s total marketable debt is about 11 percent, a multi-decade low, and down from a high of 34 percent in December 2008.

Bill Supply

The Treasury recently announced plans to increase bill auction sizes in efforts to quell extreme volatility in the short-term market for borrowing and lending debt. On March 31, Treasury repurchase agreement rates surged on March 31 to the highest level since 2012.

Rates of borrowing and lending government debt for one day, known as repos, rose to 0.366 percent, according to trading via ICAP Plc through 10 a.m., compared with 0.178 percent on Monday.

As banks have stepped back from playing the middlemen in repo trades, which have become more costly due to regulations on capital, money-market funds have ramped up usage of the Federal Reserve’s reverse-repo facility at quarter-end.

The Fed along with its regular overnight reverse repos has been offering term agreements at quarter ends to meet increased demand. The addition of the Fed’s term operations has also removed some of the liquidity from the system, causing those left in need of financing paying higher rates in repo.

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