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Updated December 31st, 2023 at 15:10 IST

US overnight funding rate hits record high amid year-end volatility

A spike in repo prices, where investors borrow against Treasury and other collateral, may indicate a shortage of cash in a crucial funding market for Wall Stree

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A gauge measuring borrowing costs on loans between banks and other participants in the US repurchase agreement (repo) market reached its highest level in about five years, according to New York Federal Reserve data released on Friday. 

The Secured Overnight Financing Rate (SOFR), a measure of the cost of borrowing cash overnight collateralised by Treasury securities, hit 5.4 per cent on Thursday—the highest since April 2018 when the New York Fed began publishing the rate.

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A spike in repo prices, where investors borrow against Treasury and other collateral, may indicate a shortage of cash in a crucial funding market for Wall Street.

However, market participants noted that the recent rise is linked to increased borrowing costs due to many dealers closing their books for the year, restricting the availability of funding.

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Tom di Galoma, Managing Director and Co-Head of Global Rates Trading at BTIG, mentioned, "The rise in SOFR is directly related to the demand for year-end financing needs and the lack of counterparties doing financing the last day of the year. Many have closed their books for the year, and it is pushing SOFR higher."

Another indicator of the cost of borrowing short-term funds backed by US Treasuries, the DTCC GCF Treasury Repo Index, spiked to its highest level since September 2019, reaching 5.495 per cent on Thursday—a four-year high.

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Spencer Hakimian, CEO of Tolou Capital Management, noted that year-end pressure in funding markets is normal, with banks slowing down activity to bolster their balance sheets for compliance purposes ahead of the new year.

Increased usage of the Federal Reserve's reverse repo facility this week, where money market funds lend to the Fed, reflects a desire to invest cash without sufficient private counterparties.

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Cash flowing into the Fed's reverse repo facility rose to $829.6 billion on December 28 from $772.3 billion at the end of the previous week. 

While the trend is expected to reverse as the new year starts, Steven Zeng, US rates strategist at Deutsche Bank, stated that the SOFR rate is still within the federal funds rate range of 5.25 per cent to 5.5 per cent, suggesting that the funding scarcity in the repo market is not worse than usual.

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(With Reuters Inputs)

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Published December 31st, 2023 at 15:10 IST

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