Long After Deal, Debt Limit Disruption Lives on in Repo Market

  • Treasury keeps bill sales small during debt-ceiling suspension
  • Lack of supply means repo rates stay low in face of Q3 end

Lew Says Debt Ceiling Being Used as Political 'Extortion'

Congress may have suspended the debt ceiling through Dec. 8, but the short-term reprieve is still distorting funding markets, particularly that for repurchase agreements.

Since the Treasury has less than three months until the limit is reinstated, it hasn’t ramped up its bill supply as much, or as quickly, as after past postponements. Three- and six-month bill auctions have increased by just $3 billion, four-week by $15 billion (less than most in the market expected), and the Treasury has yet to issue more cash management bills.

In the days leading up to quarter-end, money market funds tend to allocate more cash to bills as dealers retreat from the repo market in an effort to clean up their balance sheets, a process better known as window dressing. But as a result of the constrained bill supply, money market investors, which have increased their repurchase agreement transactions to $818 billion as of August 2017 from $343 billion in June 2015, are opting to stay in repo this time around.  

“Treasury is intentionally keeping the supply low in order to avoid the typical ramp up and crash we see surrounding a debt ceiling suspension, to avoid the herky-jerky market movements,” said Thomas Simons, a money-market economist at Jefferies LLC. “But if you look at the day-to-day activity in the repo market, investors are desperate for something.”

The abundance of demand for repurchase agreements combined with the lack of bill supply pushed the overnight repo rate to about 1.03 percent Wednesday, ICAP data show. This compares to an average of 1.43 percent at June quarter-end, which was the highest rate since September 2008.

With only two days remaining until the end of the quarter, market participants have dismissed the likelihood of a funding squeeze. Wrightson ICAP economist Lou Crandall expects Thursday’s Treasury bill settlement to boost repo rate by just 2 to 3 basis points.

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