Market Extra: 5 reasons why negative repo rates are different than the last overnight-funding crisis

Market Extra: 5 reasons why negative repo 
rates are different than the last overnight-funding crisis

2021-03-04 23:10:00

It was a major problem in September 2019 when the & # 39; repo & # 39; interest rates on overnight credit suddenly spiked to 9%, sparking concern on Wall Street and the Federal Reserve to step in to prevent a possible crisis in a major financing cog of global financing. .

Now, about 17 months later, pretty much the exact opposite has happened. Rates charged to borrowers seeking short-term funding by pledging US Treasurys and similar safe-haven assets as cash collateral plunged into negative territory on the way to Thursday.

According to an interest trader, overnight repo rates for U.S. Treasurys last seen at 0.05% on Thursdays versus -0.05% overnight on Wednesdays.

A more typical range in February was, according to DTCC's GCF Repo Index, which tracks the average daily interest rate paid on the most traded GCF US Treasury Repo contracts.

The uproar in the repo market leading up to the pandemic prompted the New York Fed to step in for the first time since 2008, offering tens of billions of dollars in daily funding that lasted for months to keep credit flowing overnight .

Here are five reasons why hiccups, this time around, are different in the US repo market.

1. At the moment it is the repo rate with negative loans, due to a lot of cash and less available short-term Treasury bonds to pledge, causing the downward fall in interest rates below zero.

"Overall, repo rates have been trading very briskly in recent weeks, and the reason is that about a month ago the Treasury said it was going to cut its cash balance," Stephen Stanley, Amherst Pierpont's chief economist, told MarketWatch.

He was referring to plans drawn up by Treasury Secretary Janet Yellen in February to expand the stockpile of more than $ 1 trillion in cash. Treasury General Account (TGA) generated in the past year of pandemic.

To highlight recent moves in key overnight rates, Oxford Economics compiled this chart, which shows a bumpy downward path since the start of the year.

Falling daily money interest rates

Oxford Economics

2. Another key factor for the current repo market is the scarcity of securities

This BofA Global chart shows that the net supply of T-notes is expected to be negative in the first and second quarters of this year, given bill installments and the government's existing financing needs around pandemic stimulus measures.

Delivery of negative accounts

BofA Global

It also shows a negative supply of $ 216 billion in net T-bill for the first quarter, as the Biden administration completes a new $ 1.7 trillion baseball-field pandemic spending package.

Under a compromise version of Biden's Senate aid package, the White House said on Thursday that 158.5 million households will receive direct payments, or about 98% of households that received payments in December.

3. The bottom line is that more cash is looking for fewer securities, making the repo rate negative for a short time.

Negative borrowing costs indicate that lenders are getting so desperate to get their hands on Treasurys, including going short in the industry, that they have had to pay money for the privilege of being an 'overnight creditor' to perform.

"There isn't enough collateral in the market," said Gregory Faranello, chief of US interest at AmeriVet Securities, but also said next week's $ 38 billion in 10-year notes could help ease the securities shortage.

4. Many people want to go short in the Treasury market right now

Stanley at Amherst Pierpont said short-term interest rates have moved towards longer-dated government bonds following the sudden rise in interest rates last week.

The hope is that by going short on Treasurys, investors will be better positioned against the threat of rising inflation and higher borrowing costs as US vaccination efforts pick up steam and help the economy heal, he said.

5. Concentrate on raising, not lowering repo rates

While the sudden spike in long-term government bond yields last week scared stocks and made headlines, analysts at BofA Global Research also predicted short-term interest rates will be "by May". could turn negative, prompting the Fed to take action to keep money market rates above zero.

In particular, the BofA Global team suggested that the most likely course of action would be for the Fed to release the interest it charges on excess reserves (IOER) increased by 0.05% "on or before" the March meeting, but "ideally" to raise interest rates from the current 0.10% to 0.20%.

Read: Here's what a hedge fund trader says happened during Thursday's bond market tantrum that pushed 10-year Treasury yields to 1.60%

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