Repurchase Agreement Rates Climb After MF Global Bankruptcy
The rate to borrow and lend U.S. government securities rose to an almost two-week high as demand for repurchase agreements declined after MF Global Holdings Ltd. declared bankruptcy and more securities entered the marketplace following auction settlements.
The average overnight general collateral repo rate was 0.14 percent as of 10 a.m. New York time, when most trading takes place, according to ICAP Plc, the world’s largest inter-dealer broker. That was the highest average morning rate since Oct. 18, and up from 0.12 yesterday and 0.07 percent on Oct. 28.
MF Global ceased entering into repo agreements after filing for bankruptcy Oct. 31, reducing competition for securities exchanged as collateral on short-term loans that bond dealers use to finance holdings and increase leverage. Fixed Income Clearing Corp., the central clearing counterparty for the inter- dealer repo market, stopped processing trades for the futures broker.
“The fact that GC repo is moving higher this morning is a sign there are still cash dislocations in the funding markets related to the MF Global bankruptcy,” Scott Skyrm, senior vice president and head of repo and money markets for NewEdge USA LLC, said in a telephone interview. “This has been the case since the FICC cut off MF Global from clearing on Monday.”
General collateral repo rates reached as high as 0.31 percent yesterday, according to Skyrm, who is based in New York.
Securities that can be borrowed at interest rates close to the Fed’s target rate, which now is in a range of zero to 0.25 percent, are called general collateral. Those in highest demand have lower rates and are called “special.”
Money market rates have otherwise held steady since the MF Global bankruptcy. The volume-weighted average for trades of overnight federal funds, known as the fed effective rate, averaged 0.08 percent yesterday. That compares to a rate of 0.07 percent on Oct. 28. The Fed pays banks a 0.25 percent rate on excess reserves they hold at the central bank.
The average rate for borrowing and lending Treasuries for one day in the repo market was 0.134 percent yesterday, according to index data provided by the Depository Trust & Clearing Corporation, the parent company of FICC. That was up from 0.062 percent on Oct. 28. The index level was below zero, at negative 0.002 percent as recently as July 14.
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.
Repo rates are rising as seasonal demand from money market funds drops and two-, five- and seven-year Treasuries as well as 30-year Treasury Inflation Protected Securities auctions settle, according to Brian Smedley, a strategist in New York at Bank of America Corp. There was a net influx of $49 billion in new securities two days ago with the settlements.
“The episode with MF Global coincides with typical seasonal upward pressure on repo rates given month-end redemptions from money market funds, which temporarily reduces cash invested in repos,” Smedley said in a telephone interview. “We also had the Treasury auction settlement, which takes a few days to filter through the market. Repo rates typically rise slightly as the Street digests the new supply.”
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