Repo market spikes, but remember 2019?
Spikes in a key short-term interest rate are raising eyebrows in the arcane but vital overnight funding market, drawing unsettling comparisons with turmoil that rocked the space more than four years ago.
Strains started showing up late last week. The bond-buying frenzy that stoked November’s U.S. debt rally led to a surge in demand for financing in the market for repurchase agreements, where participants engage in short-term lending or borrowing that’s collateralized by government securities.
This led to a large jump in short-term rates on the final trading day of November, with yields on overnight general collateral repo soaring above 5.5%. Even more unusual, the elevated levels persisted as December began.
The latest spike in repo lending rates is, of course, still orders of magnitude smaller than the market ructions that occurred in September 2019.
Back then, increased government borrowing exacerbated a shortage of bank reserves that was created when the Fed stopped buying as many Treasuries and investors had to take up the slack. Overnight repo rates in funding markets — widely relied upon by Wall Street banks to fund day-to-day operations — temporarily jumped five-fold to as high as 10%.
The Fed briefly lost control of its benchmark rate and ultimately intervened by restarting purchases of repos to stabilize the market.
“It looks, walks, and talks like September 2019, but yet I don’t think it’s being driven by quite the same reserve scarcity reasons this time around,” said Gennadiy Goldberg, head of U.S. interest rates strategy at TD Securities, who said he fielded several calls about the market on Monday.
Nevertheless, the most recent episode provides a pointed reminder of the outsize, and underappreciated, role
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