By Davide Barbuscia and Gertrude Chavez-Dreyfuss
In a significant development, the Secured Overnight Financing Rate (SOFR) in the U.S. money markets surged to 4.96% on Monday from 4.84% at the end of last week. This rise indicates tighter liquidity at the end of the month and the third quarter, as per data from the Federal Reserve Bank of New York.
Monday's increase in SOFR was the largest one-day change since March 2020, excluding moves related to Fed policy rate changes. The rate also climbed six basis points above the interest on reserve balances (IORB) that the Fed pays to banks, highlighting funding pressure.
Additionally, the DTCC GCF Treasury Repo Index, which monitors the average daily interest rate for the most-traded General Collateral Finance (GCF) repo contracts for U.S. Treasuries, rose to 5.221% on Monday, surpassing IORB by 32 bps.
Experts like Angelo Manolatos, macro strategist at Wells Fargo, have pointed to this "turbulence in repo markets" as a signal of heightened funding pressure. A spike in repo rates can indicate a shortage of cash in key funding markets, prompting the Fed to intervene, as seen in September 2019.
Joseph Abate, interest rates strategist at Barclays, noted that the rapid increase in borrowing rates on Monday suggested that banks' balance sheet capacity was less available and more costly than anticipated.
On the same day, the standing repo facility (SRF) saw $2.6 billion in lending by the Fed, marking the first daily total exceeding $200 million since the facility's launch in 2021. The Fed's cap on daily SRF lending currently stands at $500 billion.
Analysis:
The surge in U.S. overnight funding rates, particularly in the repo markets, indicates heightened funding pressure and liquidity constraints. This can impact various financial instruments and markets, leading to increased borrowing costs for institutions. Investors should monitor these developments closely as they can affect market volatility, investment strategies, and overall financial stability. Consider diversifying your portfolio and staying informed about central bank interventions to navigate these uncertain times effectively.
