Repo rates jumped at the end of Q3, with the secured overnight financing rate (SOFR) going up 13 basis points (bps) over the effective federal funds rate of 4.83%. It was 22 bps higher on Oct. 1.
“It is absolutely the kind of hiccup that needs attention,” said Lou Crandall, chief economist at Wrightson ICAP, speaking to Reuters, to a point where the Federal Reserve could address it at one of its meetings.
“There was not enough intermediation capacity to…finance all repo positions. We have been seeing signs…of the explosive growth of certain segments of the repo market that has been creating congestion on dealer balance sheets and the market in general,” Crandall said.
“There is an inelastic demand for repo that exists on a daily basis and that doesn’t change whether it’s quarter-end, or it’s year end,” said Jan Nevruzi, US rates strategist at TD Securities, speaking to Reuters. “But when dealers pull away from intermediation like it does during those periods, it creates issues like that.”
Overall, primary dealers have no desire to expand their balance sheet because it entails higher leverage charges that would require more capital, TD’s Nevruzi said.
Analysts said one reason for the jump in repo volume was the surge in basis trades, a trading strategy which takes advantage of the difference in price between cash Treasuries and futures.
“There are clear signs of money market sensitivity to shifts in the amount of cash in the system and the amount of collateral in the system, and to dealer balance sheet constraints,” said Mark Cabana, head of US rates strategy, at BofA Securities, speaking to Reuters.