KEY rates tied to the US overnight funding market are rising, even after the Federal Reserve adjusted some of its tools in an effort to rein in volatility.
The Secured Overnight Financing Rate – an important one-day lending benchmark linked to activity in the repurchase agreement market – jumped to 4.4 per cent as at Dec 24 from 4.31 per cent, according to New York Fed data released on Thursday (Dec 26). That leaves it in line with the interest on reserve balances (IORB) rate of 4.4 per cent, an indication that bank year-end balance-sheet constraints are starting to drive up the cost of overnight funding.
Other reference rates tied to the repo market – the Tri-Party General Collateral Rate (TGCR) and Broad General Collateral Rate – jumped to 4.39 per cent from 4.29 per cent, data show.
The increased rates come at a critical end-of-year moment as Wall Street watches for signs that volatility in funding markets is extending beyond the typical surges during month- and quarter-ends, when banks shore up their balance sheets for regulatory purposes by curbing repo activity.
Last week, Fed officials cut the rate on the overnight reverse repurchase agreement facility, known as the RRP, relative to the lower bound of the target range by five basis points. The tweak was in addition to a reduction of policymakers’ benchmark rate by a quarter point.
The adjusted RRP rate is meant to help keep funding markets running smoothly by driving short-term rates closer to the offering level on the Fed’s facility.
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A spokesperson for the New York Fed did not respond to a request for comment.
Last week, New York Fed president John Williams said that repo volatility could be similar to what was seen at the end of September. At the time, market rates surged, making it costlier for institutions to borrow cash for very short periods.
Balances at the Standing Repo Facility, or SRF – which allows eligible institutions to borrow cash in exchange for Treasury and agency debt at a rate in line with the top of the Fed’s policy target range – on Sep 30 also rose to the highest level since before the daily operations were made permanent more than three years ago.
This time around, the New York Fed has announced plans to offer a second SRF operation on each business day from Dec 30 to Jan 3. The bank will conduct one operation from 8.15 am to 8.30 am New York time on those days, in addition to the regular one from 1.30 pm to 1.45 pm. Both tranches will settle together on the tri-party platform later in the day.
While the extra access should offer more support during the volatile year-end period, some on Wall Street say its current framework will limit the effectiveness of the measures.
For now, markets remain on alert for further indications of volatility as they consider how much longer the central bank can continue unwinding its balance sheet, a process known as quantitative tightening.
Dallas Fed president Lorie Logan remarked in October that a wide spread between IORB and TGCR indicates that bank reserve balances – a bellwether as to whether the monetary authority’s quantitative tightening can continue – remain in excess supply. BLOOMBERG
