5 Reasons Negative Buyback Rates Are Different From The Latest Overnight Funding Crisis


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It was a big deal in September 2019 when overnight loan “repo” rates suddenly shot up to 9%, raising concerns on Wall Street and the Federal Reserve to intervene and avoid a potential crisis in a gear. key financial of global finance. . Now, some 17 months later, the exact opposite has happened. Rates charged to borrowers seeking short-term financing by pledging US Treasuries and similar safe-haven assets as collateral for cash fell into negative territory heading into Thursday.

Overnight repurchase rates for US Treasuries last stood at 0.05% on Thursday, down from a negative 0.05% overnight Wednesday, according to a rate trader. A more typical range in February had been between 0.08% and 0.10%, according to DTCC’s GCF Repo Index, which tracks the average daily interest rate paid on the most traded GCF Repo contracts for US Treasuries. The repo market turmoil before the pandemic prompted the New York Fed to intervene for the first time since 2008, offering tens of billions of dollars in daily financing that continued for months, to keep credit flowing through the night. Here are five reasons why the setbacks, this time around, in the US repo market are different. 1. Right now, the problem is negative loan buyback rates, as a result of a large amount of cash and fewer short-term Treasuries available to pledge, so the downward trend in loan rates below zero. “In general, the buyback rates have been trading very firm in recent weeks, and the reason is that the Treasury, about a month ago, said that it would start to reduce its cash balance,” Stephen Stanley, chief economist, told MarketWatch. by Amherst Pierpont. He was referring to plans outlined in February by Treasury Secretary Janet Yellen to reduce her cash reserve of more than $ 1 trillion in the General Treasury Account (TGA) generated during the last year of the pandemic. To highlight recent movements in key overnight rates, Oxford Economics produced this chart, which shows a bumpy path down from the beginning of the year.

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Fall in overnight financing rates Oxford Economics

2. Another key factor in today’s repo market is the scarcity of securities. This graph from BofA Global shows that the net supply of treasury bills is expected to be negative in the first and second quarters of this year, given the government‘s existing bill payments and financing needs around the pandemic stimulus.

Supply of negative invoices BofA Global

It also shows a net supply of negative treasury bills of $ 216 billion for the first quarter, if the Biden administration completes another $ 1.7 trillion ballpark pandemic spending package. Under a compromise version of Biden’s aid package in the Senate, the White House said Thursday that 158.5 million households will receive direct payments, or about 98% of households that received payments in December. 3. The bottom line is that more cash is chasing fewer securities, causing buyback rates to briefly turn negative. Negative borrowing costs suggest that lenders are so desperate to get their hands on Treasuries, even to be able to sell short to the sector, that they have been asked to pay money for the privilege of acting as overnight creditors. . “There is not enough collateral in the market,” said Gregory Faranello, head of US rates at AmeriVet Securities, but also said that next week’s $ 38 billion in 10-year notes could help ease the shortage of securities. 4. Right now, a lot of people want to short the Treasury market Stanley at Amherst Pierpont said that short interest has shifted to longer-duration Treasuries, following the sudden spike in yields last week . The hope is that by shortening Treasuries, investors will be better positioned against the threat of rising inflation and higher borrowing costs, as America’s vaccination effort gathers steam and helps heal the economy. He said. 5. Focus on raising, not lowering, buyback rates While last week’s sudden spike in long-term Treasury yields shook stocks and made headlines, analysts at BofA Global Research also forecast that short-term loan rates could drift into negative territory “in May,” and prompt the Fed to take steps to keep money market rates above zero. Specifically, the BofA Global team suggested that the course of action more likely the Fed would raise the interest rate it charges on excess reserves (IOER) by 0.05% “on or before” its March meeting, but “ideally” to move the rate to 0.20% from its 0.10 Current% Read: Here’s what a hedge fund trader says that happened in Thursday’s bond market tantrum, which sent the 10-year Treasury yield to 1.60%.