Brexit Haven Demand for Treasuries Drives Repo Rates to ’08 High

  • Need for funding in repurchase-agreement market surges
  • Turmoil collides with typical quarter-end phenomenon

The rate that bond dealers pay for overnight loans surged to the highest since the financial crisis after the U.K.’s decision to exit the European Union stoked demand for the haven of Treasuries.

Buyers of Treasuries frequently tap the $1.6 trillion repurchase-agreement market for short-term funding to finance the deals. When demand rises for Treasuries, that boosts the need for these collateralized loans, where dealers lend out the debt in exchange for cash. Benchmark 10-year Treasury yields plunged Friday by the most in seven years.

Overnight general-collateral Treasury repo rates averaged 0.81 percent, according to trading via ICAP Plc through 10 a.m. New York time. That’s the highest since October 2008, the month after Lehman Brother’s Holdings Inc. went bankrupt, and it’s more than double the average over the past year.

“There is an overall scramble for funding,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of the 23 dealers that trade with the Federal Reserve. “In many ways, this pulled forward the typical quarter-end funding need that usually happens. This is also not just the need to fund buying new Treasuries, but to fund those that you bought yesterday and need to keep rolling.”

Repo rates usually rise at the end of the quarter as dealers back away from repo lending to bolster their balance sheets.

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