The rate for borrowing and lending Treasuries surged as banks reined in collateral lending to shore up balance sheets and those needing financing at quarter-end were forced to pay higher prices.
The peak level Tuesday for financing Treasuries overnight in the repurchase-agreement market, relative to unsecured lending rates, reached the widest since July 2009, according to Barclays Plc. The average cost for this funding, known as general collateral repo, averaged its highest in the morning trading since October 2012, according to ICAP Plc.
Short-term interest rates have traded at historically low levels with the Federal Reserve holding its federal funds target rate at virtually zero since December 2008 to bolster economic growth. The relatively higher levels reached Tuesday aren't forecast to persist past the end-of-quarter period.
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"There is a lack of demand for holding any balance sheet, as is typical at the quarter," said Natan Magid, an interest-rate strategist at Bank of Montreal's BMO Capital Markets in New York. "On top of that, we have the Fed's term as well as overnight reverse repos, which has also sucked out some of the liquidity. So anyone that was left searching for financing couldn't really find it."
Tuesday the Depository Trust & Clearing Corp.'s general collateral finance repo index was 0.45 percent, the highest since October 2012, compared with 0.217 percent Monday.
The average level of overnight general collateral repurchase agreement rates traded through 10 a.m. New York time with ICAP, the world's largest inter-dealer broker, was 0.419 percent, compared with 0.220 percent Monday. The rate traded at 0.50 percent at 10 a.m. The federal funds effective rate was 0.12 percent Monday.
"Relative to the level of rates now, the move today is large, but it is temporary," said Joseph Abate, a strategist at Barclays in New York.
Money market funds, especially, have ramped up usage of the Federal Reserve's reverse repo facility at quarter-end, a time when dealers tend to step back from repo transactions as they shore up their balance sheets. The central bank has been testing reverse repos as a tool to eventually lift rates.
The Fed's facility has given money funds an off-ramp to avoid paying higher costs in the private market when banks step back from participation.
Fed Facility
The allotment at the central bank's overnight fixed-rate reverse-repurchase program Tuesday morning was $202.2 billion at a rate of 0.05 percent. The Fed had previously announced that its one-day agreements would take place in the morning, as opposed to the typical afternoon timing.
The Fed's term reverse repos, which extend beyond one day, totaled about $175 billion from operations this month that the central bank has used during times of high demand such as quarter-end.
"You had complications also because the Fed was doing its overnight reverse repos early in the morning on quarter-end," said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. "There was the perception that people had to preemptively lock in early in the morning as much funding as they might possibly need before the Fed. So market participants that needed funding decided that they had to take it at any price."
In a general collateral repo transaction, the lender of funds is willing to accept a variety of Treasury, mortgage-backed securities, or agency collateral. Securities dealers use repos to finance holdings and increase leverage. A repo agreement is a collateralized loan in which one party offers a security as collateral for a cash loan.
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