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MARKET INSIGHTS
September 23, 2019
Alarming Spike Last Week in Banks' Short-term Funding Costs
BY LORI ZAGER & LISA JAMES
The rates on overnight repurchase agreements, known as repos, suddenly rose above 9% last week. Repos are a common way banks and brokerage firms can borrow cash by pledging assets such as Treasury securities as collateral. In normal markets, repo rates track closely to the Fed Funds rate, which was about 2% at the time.

In response to this spike in overnight borrowing rates, the Federal Reserve used open market operations to inject more cash into the banking system. Most people think this disruption was an isolated or idiosyncratic event, but the last time the Fed conducted liquidity operations of this sort was during the financial crisis. Therefore, this week’s activity has caused some questions and concern. However, unlike in 2008, the banks appear to be in sound financial shape and there has been no accompanying widening of credit spreads to ring alarm bells.

The good news is the Fed stabilized repo rates and will to continue inject liquidity as needed. But, why did overnight funding rates jump up in the first place?  

While no one knows for sure, the funding stress is likely related to particularly large cash needs this past week. Corporations and individuals needed cash for tax payments at the same time that U.S. Treasury dealers needed to finance their Treasury auction positions. Further, since 2017, the Fed has followed a path of reducing excess liquidity in the financial system, and perhaps it’s tightened too much. Given the increased issuance of Treasury securities to fund increasing levels of US debt, it seems like more liquidity will be needed going forward.  

Fed Chairman Powell has stated they will take measures to prevent these kinds of disruptions in the future,
including regular open market operations, offering longer term repos, and potentially increasing the size of the Fed’s balance sheet.

Nothing contained herein is intended to be a formal research report, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which any accounts should be handled.  Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such. Investing involves risk, including loss of principal, and no assurance can be given that a specific investment objective will be achieved.

2x Wealth Group is a team at Ingalls & Snyder, LLC.,1325 Avenue of the Americas, New York, NY 10019-6066. (212) 269-7757

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The views and opinions expressed in the posts on this page  are those of the author and do not necessarily reflect the position or views of Ingalls & Snyder, LLC.  Certain content on this page were originally  posted in a personal blog maintained and operated independently by the author prior to joining Ingalls & Snyder, LLC. 

The content on this page are for informational purposes, and is not intended to be a formal research report, a general guide to investing, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which any accounts should be handled. Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such.  Investing involves risk, including loss of principal, and no assurance can be given that a specific investment objective will be achieved.