WSJ: Supply Surge Sends Overnight Rates Above 10-Year Yields

The persistent supply of U.S. government debt flooding the bond market this year has done little to raise bond yields, except in the market for the shortest-term securities.

The cost to borrow cash overnight has been elevated in part of the market for repurchase agreements—or repos—where lenders such as money-market funds make short-term loans to bond brokers, often using government debt as collateral. The overnight rate on Treasury repos was 2.47% Friday, compared with the 2.35% rate for interest on excess reserves, or IOER, or 2.048% for 10-year Treasury notes.

The gap between repo and IOER, which is the interest the Fed pays to banks that hold excess reserves with the central bank, exists largely because the rising supply of U.S. government debt has left bond dealers holding more of it than usual.

The Fed’s network of primary dealers, who are required to bid at government debt auctions, held a total $238 billion of the securities on July 10. That is roughly $100 billion higher than a year ago. That has led them to seek ways to benefit from the holdings, such as lending them in repo trades, analysts said.

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