A sudden spike in SOFR (Secured Overnight Financing Rate) points to a mounting reserve shortage and an overnight repo spike, surprising many as SOFR printed at 5.39% on Friday. This departure from the market’s accustomed pattern, where overnight Repo GC rates spike without a corresponding rise in SOFR, underscores the imperfections of SOFR as a hedge for Repo and financing—described metaphorically as the “cleanest dirty shirt.”
Adding to the intrigue, a casual request for $200 million in the Standing Repo Facility (SRF) suggests increased activity in the overnight repo market, surpassing levels observed during regional bank challenges in April/May. Meanwhile, the National Federation of Independent Business (NFIB) predicts a resurgence in inflation in the coming months. If this scenario unfolds, the Federal Reserve may find itself constrained, making it challenging to bail out banks once again.
SOFR pic.twitter.com/4cUX0VhtA0
— Golden Coast (Cassandra) (@GregCrennan) December 5, 2023
"Casually", someone requested $200 million today in the Standing Repo Facility (SRF). 🕵️♂️🤨 pic.twitter.com/IAehixflS0
— Bull Stocks (@BullStockss) December 6, 2023
The Canary Just Died: Sudden Spike In SOFR Hints At Mounting Reserve Shortage and Overnight Repo Spike #Fed #Banks t.co/h3H9j9eBXp
— The Coastal Journal (@1CoastalJournal) December 5, 2023
Full Disclaimer: I'm 100% in the disinflation camp when it comes to 2024/25. Slower economic growth is the best cure for inflation, and slower growth is what you see after a Fed tightening cycle. This chart argues that the path to that scenario is going to have a lot of zig zags. pic.twitter.com/Vs0m7zFM7j
— Francois Trahan (@FrancoisTrahan) December 5, 2023
Repo-Market Spikes Conjure Memories of September 2019 US Funding Turmoil
(Bloomberg) — Spikes in a key short-term interest rate are raising eyebrows in the arcane-but-vital overnight funding market, drawing unsettling comparisons with turmoil that rocked the space more than four years ago.
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