Something rather peculiar happened within a key piece of the global financial system’s plumbing overnight.
Under a repo, the borrower provides high-quality collateral like Treasury notes in return for cash, agreeing to buy back the collateral at a slightly higher price, with the difference being the amount borrowed and the amount paid to reacquire the securities effectively providing the interest rate.The agreements are usually very short term, often overnight, although they can be up to 90 days.
This time the source of the dislocation appears to be quite different and relates more to the availability of short term cash rather than the quality of the collateral. The payments of those taxes, estimated at more than $US100 billion, meant a large amount of cash was withdrawn from those funds, which are a source of the cash for repo deals.
While the coincidence of cash-absorbing events probably explains the extent to which repo rates were impacted, there are some structural factors at play.
Just your everyday funding crisis in the world’s biggest economy. Nothing to see here.....
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