Repo Pressures Join Fed Hikes in Driving Up Dollar Funding Costs
- SOFR is now clearly above the Fed reverse repo facility rate
- ‘Collateral has recently started to overwhelm cash,’ BofA says
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Short-term dollar borrowing costs are being driven higher by more than just the expectation that the Federal Reserve will keep pushing up its overnight benchmark. The effects of central bank balance-sheet reduction are finally being felt now too and there’s probably more to come.
Benchmark hikes are, of course, the biggest driver behind the surge in front-end market interest rates this year: the fed funds target has risen by 375 basis points and has at least another 100 to go before it tops out, if traders are right. But in addition to that, “small but significant shifts” are taking place in money markets that’s creating extra pressure, according to Bank of America Corp. analysts Mark Cabana and Katie Craig.