Goldman: Sub-RRP SOFR Setting Likely Temporary

Goldman Sachs note that “the volume-weighted SOFR dropped below the RRP facility rate last week, setting 3bp through on Wednesday and Thursday. We suspect this reflects the intersection of increased short interest in front maturities (particularly 2-Year and in), the usual intra-month influx of GSE cash, and continued shortage of collateral (~$125bn of bill pay-downs in March). Constrained dealer willingness to take in cash appears to have left GSEs with the RRP facility as the best option. Movement in cash around the system is suggestive that this dynamic; RRP balances rose by roughly $190bn week-over-week through March 23, while reserves dropped by roughly similar magnitude. We last observed a similar pattern in October 2021, where a similar set of factors had led to lower SOFR fixings. As was the case then, the left tail of the SOFR distribution has been squeezed lower, while the 75th percentile has remained sticky, and TGCR unchanged. Overall, the shifts in money over the past week seems more short term in nature; we don’t as yet see inflows into money market funds on account of improved yield pick-ups relative to bank deposits, though we expect this will be the case in the initial phase of the hike cycle.”