Poor T-Bill Auctions Point to Investor Skepticism on Repo Market Calm

(Bloomberg) -- The volatility in the repo market has abated for now, but if Thursday’s Treasury bill auctions are any indication, investors are skeptical that this will last.

The Treasury sold $45 billion of four-week bills and $40 billion of eight-week bills at 1.95%. The when-issued level for the four-week security was trading at 1.90% a few hours before the sale, and the eight-week traded as low as 1.885%, according to Jefferies.

“Before the auction, GC dipped below 2% but the four- and eight-week when-issued sold off five and eight basis points from earlier this morning to the auction and both of them tailed,” said Jefferies money-market economist Thomas Simons. “Clearly no one has any confidence that repo is going to remain below 2% for more than 15 minutes.”

The rate on overnight general collateral repurchase agreements spiked to 10% Tuesday, about four times greater than last week’s levels, as cash reserves in the banking system remained out of balance with the volume of securities on dealer balance sheets. The level retreated over the last two days and traded below 2% Thursday, ICAP data show.

The Federal Reserve added a third dose of liquidity Thursday to a vital corner of the funding markets to calm the markets. The New York Fed injected $75 billion through an overnight repo operation, following a dose of the same size on Wednesday and $53.2 billion on Tuesday.

Even over the short-run there’s still risks of funding pressures resurfacing, between month-end Treasury auction settlements and banks retreating from the repo market to shore up their balance sheets at the end of the quarter.

“The next 11 days are going to be a disaster,” Simons said. “If you stack up on both sides the arguments for repo going higher again, it’s all of these things that drain cash out of the market that are persistent issues or unknown but could be persistent. Where are the arguments for repo going lower?”

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net

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

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