US TSYS/OVERNIGHT REPO
The NY Fed's data confirms secured rates jumped sharply on Dec 24, with a 4.40% SOFR print, up from 4.31% on Dec 23 (Wrightson ICAP had estimated 4.38% and even that lower estimate would have meant "overnight GC rates tightened even more than we expected").
- It is of course coming up on month/year/quarter-end so while rates may subside slightly in today's session, upside pressures are expected to re-emerge as soon as Friday. The September end-quarter episode, in which secured rates jumped ~20bp, is on the Fed's mind - but overall they seem calm about any potential pressures - NY Fed President Williams said on Dec 20:
- "I think there's ample liquidity to see the financial system... I think we will see a little bit more pressure in the repo markets, as we were referring to at the end of the third quarter. We'll probably see that year end. What I'm seeing right now is more of the pattern we saw before. We had just super abundant reserves, little bit more short term volatility in repo markets. One is not spilling into the Fed funds rate. It's not in any way affecting the interest rate that we're targeting at the FOMC. And the second is, these are very short lived. So I feel that we will probably see some pressures, but probably the kind that we saw, say, at the end of the third quarter, or maybe a little bit more. One sign that things are, you know, gives me some reassurances, clearly, market participants in anticipating some pressures there have been preparing for that. We're seeing, you know, taking term repo, other things to make sure they're well positioned for the year end and not caught off guard, but we'll watch and see. But again, I feel like we're well positioned in terms of the liquidity and the tools that we have."
- The Fed has seemed confident reserves remain abundant and it can continue QT until it sees particular warning signs of reserve scarcity - year-end issues present signs of strain but aren't considered to be signs of reserve scarcity in their own right. Note that the NY Fed is upping the ante for this year-end period: In addition to its daily standing repo operation at 1330-1345ET, it will offer another one between 0815-0830ET daily from Dec 30 through Jan 3, while "the aggregate operation limit of $500 billion will apply to the combined daily operations." That came after the September episode when standing repo facility takeup soared.
For its part, Wrightson ICAP notes "in many ways, the market seems reasonably well prepared for the year-end statement date. However, the artificial statement-date incentives created by current regulatory and financing reporting practices will inevitably lead to significant upside distortions in repo rates."
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