By Davide Barbuscia and Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -A key U.S. overnight funding interest rate jumped on Monday in a sign of tighter liquidity in money markets at the end of the month and the third quarter.
The Secured Overnight Financing Rate (SOFR), a measure of the cost of borrowing cash overnight collateralized by Treasury securities, rose to 4.96% on Monday from 4.84% at the end of last week, data from the Federal Reserve Bank of New York showed on Tuesday.
Excluding moves that occurred when the Fed changed its policy rate, Monday’s SOFR increase was the biggest one-day change since March 2020, data showed.
The rate rose six basis points (bps) above the interest on reserve balances (IORB) that the Fed pays to banks, a sign of funding pressure.
Meanwhile, the DTCC GCF Treasury Repo Index, which tracks the average daily interest rate paid for the most-traded General Collateral Finance (GCF) repo contracts for U.S. Treasuries, rose to 5.221% on Monday, some 32 bps above IORB.
Angelo Manolatos, macro strategist at Wells Fargo in New York, said in a note that the “turbulence in repo markets” signaled heightened funding pressure.
A spike in the price for repurchase agreements, or repos, can be a sign that cash is getting scarce in a key funding market for Wall Street. Short-term funding costs spiked in September 2019 due to a large drop in bank reserves amid a corporate tax deadline and increases in net Treasury issuance. That forced the Fed to intervene by injecting liquidity into repo markets.
“Repo rates normally trade higher on quarter-ends, as balance sheet reporting causes dealers to rein in their matched book activity,” Joseph Abate, interest rates strategist at Barclays, said in a note on Tuesday.
But he said the rapid jump in borrowing rates on Monday indicated banks’ balance sheet capacity proved “far less available than expected and significantly more expensive.”
Also on Monday, the standing repo facility (SRF), which allows eligible firms to hand Treasuries or other securities to the Fed for cash, saw $2.6 billion in lending by the U.S. central bank. That was the first daily total of more than $200 million since the launch of the facility in 2021.
The cap on daily SRF lending is currently at $500 billion.
The Fed lent $250 million against mortgage-backed securities collateral and $2.35 billion against Treasury collateral, data showed. The majority of the Treasury borrowing was done at a rate of 5.01%, above the minimum bid rate of 5.00%. The Fed reported high and low rates of 5.01% and 5.00%, respectively, with a weighted average of 5.007%.
Lou Crandall, chief economist at money market research firm Wrightson, pointed out that only $2.6 billion of collateral was financed through the Fed at rates near 5.00%, on a day when other repo rates funded Treasury collateral at higher levels.
For instance, Wrightson cited $94 billion of Treasury GCF repo went through at an average rate of 5.22% in the market and $74 billion of MBS collateral was funded at an average of 5.45%.
“That is not a sign of an effective ‘ceiling’ tool,” Crandall said, referring to the SRF. “Still, it was a welcome start…as one or more institutions were actually willing to use the facility for a change.”
On Tuesday, there was zero volume on the SRF, suggesting that Monday’s surge in activity was month-end pressure.