Congress may have suspended the debt ceiling through December 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.
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.
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.