Dollar Funding Market Is Feeling the Strains of Too Much Cash
(Bloomberg) -- The glut of cash in the financial system and increasing bets on rising U.S. yields are once again pressuring interest rates in the short-term funding market, where institutional holders of cash make overnight loans collateralized by U.S. Treasury securities.
The Secured Overnight Financing Rate, the Federal Reserve’s preferred replacement for Libor, dropped to 0.04% from 0.05% on Dec. 20, according to New York Fed data published Tuesday. It was the first decline in the benchmark since October.
The conditions that spurred the decline two months ago mirror the current environment. It’s an increased demand for specific Treasuries in the market or repurchase agreements as short positions need to be financed, as well as the monthly influx of cash from government-sponsored enterprises that is parked in the funding markets this week.
“It’s largely the same set of circumstances as in October,” said TD Securities strategist Gennadiy Goldberg. “Lots of cash in the system and not a lot of collateral and that’s weighing down repo.”
The general collateral repo rate has been under pressure this year owing to the glut of cash created by the Fed’s asset purchases and the Treasury’s shrinking holdings, even as tapering is underway and the resolution of the debt ceiling has cleared the way for more bill supply. But bets on interest-rate increases by central banks globally are ramping up.
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