Repo Ruckus Strikes Again as Capital Rules Compound Bill Squeeze

  • Financial-conditions snapshot day escalates repo-rate spike
  • Reduced bill supply leaves fewer safe places to park cash

Regulatory pressure on banks is colliding with a squeeze in Treasury bills to roil the U.S. money markets as the third quarter draws to a close.

In the $1.6 trillion-a-day market for repurchase agreements -- where investors lend cash to dealers in exchange for Treasuries -- the rate on one-day transactions soared to almost triple Tuesday’s level. It’s the third straight quarter-end where the repo cost has surged, reaching levels the market hasn’t seen since 2012. Heightened swings in the repo world make it costlier for dealers to fund debt positions, which may reduce demand at Treasury auctions and add to the government’s borrowing costs.

Repo rates are rising as banks step away from dealing to bolster balance sheets at quarter-end, when demand from money-market funds typically rises for bills and repos. Exacerbating the move, it coincides with a day when the Federal Reserve takes a snapshot of the finances of the largest U.S. banks to gauge the extra capital they must pony up as part of being categorized as a globally systemically important bank, or GSIB.

“The usual balance-sheet shrinkage is more significant this time,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole SA. “This has made the quarter-end time a bit more stressful than usual and we’ve seen the market moving in unstable ways.”

Surge Afoot

Overnight repo rates rose to 0.35 percent Wednesday from 0.13 percent Tuesday, according to trading via ICAP Plc through 10 a.m. New York time. The level is the highest since it reached 0.37 percent June 30 and 0.42 percent March 31. The rate has averaged 0.15 percent since December 2008, when the Fed cut its policy rate to near zero.

Treasury has discussed with dealers ways to adjust bill issuance to ease quarter-end volatility. Yet the department wound up reducing bill auctions in recent weeks to keep under the U.S. debt limit. Bills have shrunk to about 11 percent of the government’s marketable debt, down from 34 percent in December 2008.

With demand outstripping supply, four-week bill rates traded at negative 0.015 percent Wednesday, after reaching negative 0.046 percent on Sept. 18, the lowest since 2008.

Regulatory Role

Policy makers’ efforts to avert another financial crisis are compounding the repo tumult.

Global regulators have enhanced capital standards for financial institutions deemed systemically important. As part of this, heightened capital surcharges were placed on globally systemically important banks, dubbed GSIBs.

The Fed is focusing on eight U.S. bank holding companies and this year began calculating the surcharges that will be due beginning next year. In the Fed’s snapshot of their finances, the amount of wholesale funding activity, such as repos, tends to boost capital requirements, leading banks to curtail that business on reporting dates.

“The GSIB added a new wildcard factor to this quarter-end,” said Scott Skyrm, New York-based managing director at Wedbush Securities Inc. “How high repo rates go on Wednesday depends on how much of the adjustment made previously to meet these requirements were left in place.”

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