Joseph Abate at Barclays Capital sure loves a mystery.
Recently, he puzzled over why US GC repo rates were trading stubbornly higher than US unsecured rates…
But in his latest note, he points out that the Fed’s most recent balance sheet update not only fails to answer these questions — it also doesn’t explain surprising further shifts in the US repo market, observed last Wednesday.
As he noted (our emphasis):
More importantly, the Fed’s balance sheet figures failed to shed any light on the surprising heaviness in the overnight repo market since Wednesday.
On Wednesday, the mid-month coupon settlement and the corporate tax date were expected to push Treasury repo rates up about a basis point or so. Instead, repo rates spiked sharply, to eventually trade at 5-8bp over the effective fed funds rate.
Our initial reckoning was that there had been a shift in the liquidity allocation of GSE cash away from the repo market given that Wednesday was also the principal and interest payment date on MBS securities.
But the Fed’s figures indicate that the GSE balance held at the Fed was less than $0.5bn – clearly, not sufficient to push Treasury collateral rates up more than 5bp.
Moreover, the pick up in refinancing activity in the last month or so would have meant that the amount of cash to be allocated was significantly higher – which all things equal should have richened repo rates. Thus, we are as stumped as the rest of the market, although based on trading late Thursday, overnight repo rates seem to be returning to more normal levels with respect to the effective fed funds rate.
Now, readers might be inclined to check the recent heavy spell in GC rates for themselves via Bloomberg’s general collateral repo rates function.
If they did that, they would find this:
Which on a longer duration, doesn’t look all that out of the ordinary:
But, of course, it’s worth bearing in mind that repo rates are highly subjective — and come out quite differently depending on who you are in the market, and what you see.
Which is why the same equivalent from the Barclays Capital point of view actually looks like this:
With more recent activity looking much more out of the ordinary than the Bloomberg data might suggest:
For those seeking yet more mystery yet — check out Bloomberg’s 3-month GC rates (as compared to 3-month Libor), which appear either no longer tracked at all, or genuinely stuck constant at 0.8 per cent:
Which, of course, is a somewhat different 3-month GC repo rate to the one being witnessed by Barclays Capital:
In fact, a longer duration chart from Barclays shows you just how exceptional the recent inversion of the two 3-month rates above actually is:
So what does it all mean, we wonder?
Related links:
Repo is still puzzlingly inverted – FT Alphaville
In the land of two curves, and one price – FT Alphaville
‘General collateral remains puzzlingly inverted to fed funds’ – FT Alphaville
Euribor has been vaporised – FT Alphaville