Fearing Another Repo Spike, Janus Build Up Its Cash Pile

(Bloomberg) -- Janus Henderson Group Plc is bracing for a repeat of September’s repo-market turmoil to play out in the final weeks of 2019.

Nick Maroutsos, the firm’s global bonds co-head, expects that repo rates will “spike” as typical year-end funding strains emerge. The Fed has been injecting liquidity since Sept. 17 to calm money markets. But Maroutsos warned that may not be sufficient as banks pare back lending heading into the turn of the year as they shore up balance sheets to meet regulatory requirements.

For Maroutsos, the best way to prepare for the anticipated strains is by building up cash. The firm’s $1 billion Janus Short Duration Income exchange-traded fund, which trades under the ticker VNLA, typically keeps up to 5% of its holdings in cash, he said. He’s looking to increase that pile and then deploy it as banks step back.

“The way to take advantage of this is you have to be cash-rich,” Maroutsos said. “Dollars will be in high demand, so managers that have large amounts of dollars will be able to benefit probably.”

In September, the overnight repo rate spiked to four times usual levels at the time as cash reserves fell out of alignment with the volume of securities on dealer balance sheets. The episode prompted the Fed to step into the market with overnight and term repurchase agreement operations and to begin buying $60 billion of Treasury bills per month.

The turbulence presented an opportunity for some fund managers. Janus’s approach was to enter into short-dated dollar-yen forward contracts, which allowed it to effectively lend out greenbacks in exchange for yen cash.

It’s unclear what opportunities will arise this time around, Maroutsos said -- but he wants to be prepared. In 2018, repo spiked at year-end, with overnight rates soaring above 6%.

“There’s a number of ways to do it, the problem is we don’t know what that’s going to be right now,” Maroutsos said. “We’re waiting, we’re keeping an eye on it, and will be likely putting money to work here in the near-term.”

Papering Over

He’s not alone in warning of year-end turbulence. Deutsche Bank AG strategists wrote last week that the Fed will need an “all in approach” to contain repo rates during the final weeks of 2019. The analysts also wrote that “sensible revisions” to capital requirements are needed, though impractical before year-end.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said last month that post-crisis regulations prevented his bank from deploying cash into the repo market during the September upheaval. Treasury Secretary Steven Mnuchin said he was open to loosening those liquidity rules.

While that would help free up banks’ reserves, it’s unlikely to happen “overnight,” according to Maroutsos. The Fed could also address the problem through a permanent effort toward balance-sheet expansion, potentially in the form of a repo facility, a tool that would allow eligible banks to convert Treasuries into reserves on demand at an administered rate.

Either way, for him the Fed’s actions haven’t been enough to fix the deep-seated issues in the repo market.

“They’re kind of papering over the problem,” Maroutsos said. “They’re providing liquidity, which is helpful, but it doesn’t address the real issue at hand.”

To contact the reporters on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net;Alexandra Harris in New York at aharris48@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Nick Baker

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