US repo rates hit high of 4.36% on Wednesday Liquidity is declining, should be monitored, analyst says US Treasury settlements are one factor for funding rate rise
NEW YORK, Oct 15 (Reuters) – U.S. banks borrowed $6.5 billion from the Federal Reserve’s Standing Repo Facility (SRF) on Wednesday, central bank data showed, and repurchase rates rose, suggesting tightness in meeting funding obligations with a large net Treasuries settlement due this week. That was the biggest daily borrowing from the Fed since the [REDACTED]-19 pan demic, excluding end-of-quarter periods.
The SRF acts as a liquidity backstop for potential funding shortfalls. Introduced in July 2021 in response to the pandemic, the Fed’s facility provides twice-daily overnight cash loans in exchange for eligible collateral such as U.S. Treasuries.
The general collateral or GC repo rate, which is the cost of borrowing short-term cash using Treasuries or other debt securities as collateral, hit a high of 4.36% on Wednesday, according to Curvature Securities. It closed the session at 4.12%. On Tuesday, the GC rate touched a peak of 4.32%, up from Friday’s 4.20%. The rise in the repo was unusual, traders said, given that it is not a month-end or quarter-end, when repo rates tend to jump as banks pull away from acting as middlemen due to higher balance sheet costs required at those times for reporting purposes.
“This is just more signs that liquidity is slowly, but surely, decreasing. Nothing alarming yet, but if SRF is continuously tapped the Fed should pay even more attention,” said Jan Nevruzi, U.S. rates strategist at TD Securities in New York. Fed Chair Jerome Powell has signaled that quantitative tightening “is likely to be done soon and this emphasizes the possible need to announce the end as early as the October meeting,” Nevruzi said.