US Overnight Interest Rate Surges To 10%, Fed Injects Emergency $75 Billion

Overnight interest rates surged to 10% and no one understands why.

What's Going On?

Bloomberg reports Overnight Funding Rate Surges to Record Levels.

U.S. money-market interest rates surged for a second day Tuesday as cash reserves in the banking system remained out of balance with the volume of securities on dealer balance sheets.

Amid the squeeze, the effective fed funds rate rose to 2.25%, in line with the top of the Federal Reserve’s target range of 2% to 2.25%.

The rate on overnight general collateral repurchase agreements soared by more than 600 basis points to 8.75%, based on ICAP pricing, before settling back around 7.25%. Surges are commonplace only around quarter- and month-end, so market participants had expected things might return to normal.

On Monday, the rate on overnight GC repo soared by as much as 248 basis points to 4.75%, the highest level since December, according to ICAP pricing, amid the settlement of Treasury coupon auctions and the influx of corporate quarterly tax payments, possibly aggravated by last week’s bond-market selloff, in which investors sold securities back to dealers.

Separately, the Secured Overnight Financing Rate, which is backed by overnight GC repo transactions, rose to 2.43% Monday from 2.20%, New York Fed data show. That’s the highest since July 31.

Federal Reserve Injects $75 Billion Into Financial System

The Financial Times reports Federal Reserve Injects Billions of Dollars Into Financial System

TD securities points the finger at bank reserves.

We think that the culprit is the scarcity of bank reserves, which are the only asset that provides banks with intraday liquidity. Reserves have been declining since 2014 and we expect them to decline further as Treasury’s cash balance increases and currency in circulation grows.”

The Fed seems to have fixed whatever the problem was with the $75 billion injection. Repo rates are back down, for now.

Technical Factors

A reader commented: "Analysts said there were technical factors squeezing the repo market rather than the systemic issues that drove overnight rates much higher during the financial crisis. Now, what are the technical factors?"

Sometimes there is an end of month squeeze but this happened on Sept 16 and again September 17.

"This mid-month surge was attributed to a confluence of events that knocked cash reserves in the banking system out of balance with the volume of securities on dealer balance sheets: a corporate tax payment date, settlement of last week’s Treasury auctions, and last week’s bond-market sell-off, in which investors sold securities back to dealers."

Chris Whalen Chimes In

Still Crazy After All These Years

Quadruple Witching

We also have Quadruple Witching on Friday.

Quadruple witching refers to the third Friday of every March, June, September, and December. On these days, market index futures, market index options, stock options, and stock futures expire.

Bottom Line

Someone was in serious need of cash and got it.

Disclaimer: The content on Mish's Global Economic Trend Analysis site is provided as general information only and should not be taken as investment advice. All site content, including ...

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Wendell Brown • 5 years ago • Member's comment

When you say 'no one understands why' and then proceed to give lots of quotes explaining why, are you saying that nobody has it right? Or is that just a lazy way of saying here are some ideas why...

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