by Chris Black
Last Friday the Secured Overnight Financing Rate (SOFR), a repo rate serving as the Fed’s new target reference rate , jumped 6 basis points (6 bps, 0.06) to above the Fed’s target range.
SOFR measures (https://www.newyorkfed.org/markets/reference-rates/sofr) the median cost of Treasury repo borrowing.
The jump not only caught most people off guard, but got eerily little attention. It likely reflects several market factors and a little bit of unfortunate timing (not unlike September 2019), but to the former New York Fed group officer Mark Cabana (now at BoA), the context is simple:
“The move is consistent with the theme of less cash in the system but may have been exacerbated by elevated dealer inventories , bilateral repo borrowing demand, and limited excess cash to backstop repo. If funding pressure persists, it risks Fed reassessment of ample banking system reserves & potential early end to QT.”
Recent months have also seen a “month-end overhang” on the last day of the month, when banks are known to scale back their repo-market lending for regulatory reasons (known as “window dressing , further reducing cash in the repo system until that cash reenters the repo market in the second week of the month.
Not only that, but there were also approximately $96b in month-end Treasury settlements the day prior.
Overnight tri-party repo rates (https://www.newyorkfed.org/markets/reference-rates/tgcr) (5.31) moved above the Fed’s RRP rate (5.30) last week.
Historically, the TPR rate is proxied to at or below the RRP rate.
And although TPR is only 1bp higher, that difference has managed to pull $100-$150b out of the RRP (https://www.newyorkfed.org/markets/desk-operations/reverse-repo) in just days.