Recent Developments in Treasury Market Liquidity and Funding Conditions
May 09, 2025
Roberto Perli, Manager of the System Open Market Account
Remarks at the 8th Short-Term Funding Markets Conference, Federal Reserve Board, Washington, DC
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In April, repo market functioning remained orderly, with limited Treasury repo rate variability and no apparent issues with dealer intermediation…. Treasury repo rates—as measured by the Tri-Party General Collateral Rate (TGCR), represented by the light blue line, and the Secured Overnight Financing Rate (SOFR), represented by the dark gray line—were somewhat volatile but traded within recent ranges, even at the peak of liquidity strains in the Treasury cash market. And various proxy measures of dealer intermediation costs in the Treasury repo market remained within recent historical ranges. In contrast, repo intermediation costs jumped in March 2020 as funding liquidity broke down.
With repo rates relatively steady and with the supply of reserve balances remaining clearly abundant, the stability of the effective federal funds rate (EFFR) within the trading range set by the FOMC was never in question. That was obviously important because rate control is crucial for the effective implementation of monetary policy.
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The stability of funding liquidity was important also because it likely prevented further selling pressures in the Treasury market. For example, a disruption of funding liquidity could have prompted an unraveling of convergence trades such as the cash-futures basis trade, where investors seek to profit from small differences between the prices of Treasury securities and Treasury futures contracts.
One factor that could lead to a rapid unwind of the basis trade is substantial repo rate volatility or a persistent increase in repo rates, which could in turn increase the cost of financing the position and therefore make it unprofitable. But this by and large did not happen in April since repo rates were fairly stable and dealers remained willing and able to intermediate. As a result, according to Desk staff’s estimates, the basis remained relatively stable.
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The Desk conducted an early-settlement SRF small-value exercise for the first time on March 5 to test capabilities. Given the positive assessment and feedback received, the Desk conducted early-settlement SRF operations, in addition to the afternoon operations, each day from March 27 through April 2, spanning the March quarter-end. The operations went smoothly and were regarded as successful.
Our market outreach following the March quarter-end revealed that primary dealers see the early-settlement SRF operations as an enhancement that increases the likelihood that the SRF will be used when economically convenient to do so. This is especially true for non-U.S.-bank-affiliated primary dealers, though this group is relatively small and accounts for only about a tenth of primary dealer repo borrowing. Dealers also reported that early settlement lowers hurdle rates—that is, the rate in excess of the SRF rate they are willing to pay in the market before choosing to access the SRF.
The full speech is available here.