JPMorgan Warns of Possible Return of Year-End Funding Stress

(Bloomberg) -- Money markets are drowning in cash but JPMorgan Chase & Co. strategists still see the possibility of the usual year-end funding stress.

A stabilization in repurchase rates thanks to lower intraday volatility is one sign markets are normalizing, a team including Joshua Younger wrote in a note Friday. Meanwhile, there’s no obvious consensus on how regulators will revise bank leverage ratios -- a key cause of the traditional year-end funding drought -- with political pressure making it difficult to reduce their capital requirements, they said.

“Funding market rates will not likely remain on the floor forever, and the outlook for Treasury bill supply and the Treasury General Account balance points to some potentially material shifts in the supply/demand balance in the coming months,” the strategists wrote. “There are potentially some canaries in repo pricing -- at least for a return to something more resembling normalcy.”

The JPMorgan team sees incremental stresses appearing over a medium-term horizon and a more challenging year-end in money markets. As a result, they recommend investors sell December 2021 Eurodollar futures to prepare.

The spread between implied Libor at year-end and the current level is around eight basis points.

“To be clear, we do not expect a funding shock, and there is still quite a bit of time to go,” the team wrote. “But more risk premium strikes us as reasonable.”

Even so, strategists at TD Securities are predicting tightening spreads between September and December 2021 eurodollars, targeting 2 basis points. That’s because after the increase this year in scores for global systemically important banks, it will be more difficult for them to pare their exposure at year-end without causing market dislocations, according to TD.

“Since the banks are well into higher GSIB buckets, they will continue to run at higher surcharges without shrinking their balance sheets dramatically into year-end,” TD Securities strategist Gennadiy Goldberg said in an interview. “This should help shore up year-end liquidity.”

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