Bizarre Repo Rate Surge Continues And Nobody Can Explain Why

Yesterday we showed what was arguably the strangest move that took place on the last trading day of 2018, when the overnight general collateral repo rate shot up from 2.5% last Friday to as high as 6.125% on Monday, the biggest one day move on record, bringing overnight GC repo to the highest level since January 2001.

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While violent year-end moves are well-known in the overnight funding markets, the magnitude of yesterday's surge was simply unprecedented, and commenting on the GC Repo surge, Scott Skyrm, EVP at Curvature Securities said that "the cash never came in", noting that while "funding pressure should be about 50 basis points" and yet what we got was "350 basis points".

While clearly there was something amiss with year-end liquidity - in a day in which the 1 Year yield closed above both 5Y and 7Y yields - the record spike in repo still left rates traders scratching their heads, with Skyrim warning that market participants may have to start pricing in the fact that if repo rates "spike up a bit, they could go much higher".

He was right, because one day after GC repo normalized on January 1, it has since exploded higher once again, and on Wednesday, the overnight GC repo rates spiked again, and this time one couldn't blame it on year-end funding pressures for the simple reason that it is no 364 days until the next year-end.

As shown in the chart below, GC was averaging about 3.25% as of 8:30 am ET, according to Nex data after averaging 3.50% at the 8 am open after dropping back to 2.50% on Tuesday and rising as high as 4.525% on January 2, after the new year.

(Click on image to enlarge)

Commenting on the move, Stone & McCarthy said that overnight GC has been “very volatile again already this morning,” ranging anywhere from 3.30% to above 4%, in a move which was not supposed to happen if all the Dec 31 volatility reflected was year-end "window dressing" liquidity plumbing (again: it's now Jan 2).

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