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Updated December 30th, 2023 at 14:49 IST

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

On Thursday, the SOFR, reflecting the cost of borrowing cash overnight collateralised by Treasury securities, spiked to 5.4 per cent.

Reported by: Business Desk
Bank of Korea meets on Thursday for the last rate decision for this year, after six straight meetings of rate hold. It last raised interest rates in January
US overnight funding rate hits record high amid year-end volatility | Image:Pexels
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The Secured Overnight Financing Rate (SOFR), a key metric measuring borrowing costs in the US repurchase agreement (repo) market, reached its highest level in about five years, according to data released by the New York Federal Reserve on Friday.

On Thursday, the SOFR, reflecting the cost of borrowing cash overnight collateralised by Treasury securities, spiked to 5.4 per cent, marking its highest level since April 2018 when the New York Fed first began reporting the rate. The surge in repo prices, where investors borrow against Treasury and other collateral, often indicates a tightening of cash availability in a crucial funding market for Wall Street.

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Market participants, however, offered insights suggesting that the recent increase is attributed to higher borrowing costs driven by many dealers closing their books for the year, thereby restricting the availability of funding. Tom di Galoma, Managing Director and Co-Head of Global Rates Trading at BTIG, noted that the rise in SOFR is directly linked to the demand for year-end financing needs and the limited number of counterparties engaged in financing on the last day of the year.

Another significant measure of the cost of borrowing short-term funds backed by US Treasuries, the DTCC GCF Treasury Repo Index, hit a four-year high at 5.495 per cent on Thursday, reflecting increased pressures in funding markets as banks slow down activity to fortify their balance sheets for compliance purposes ahead of the new year.

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Spencer Hakimian, CEO of Tolou Capital Management, stressed that year-end pressure in funding markets is normal, as banks tend to curtail activity to bolster their balance sheets for regulatory compliance. However, he indicated that unless this trend persists through January, it should not be a cause for concern.

The heightened usage of the Federal Reserve's reverse repo facility this week, where money market funds lend to the Fed, has been observed as evidence of money market funds seeking investment opportunities but lacking private counterparties. The cash flowing into the Fed's reverse repo facility increased to $829.6 billion on December 28, up from $772.3 billion at the end of the previous week.

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While acknowledging the current year-end behaviour as banks reduce their balance sheet usage, Steven Zeng, US Rates Strategist at Deutsche Bank, expressed confidence that the trend should reverse as the new year begins, emphasizing that the SOFR rate remains within the federal funds rate range of 5.25 per cent to 5.5 per cent.

(With Reuters inputs)

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Published December 30th, 2023 at 14:49 IST

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