By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -U.S. banks borrowed $6.5 billion from the Federal Reserve’s Standing Repo Facility (SRF) on Wednesday, central bank data showed, and repurchase rates rose, suggesting tightness in meeting funding obligations with a large net Treasuries settlement due this week.
That was the biggest daily borrowing from the Fed since the COVID-19 pandemic, excluding end-of-quarter periods.
The SRF acts as a liquidity backstop for potential funding shortfalls. Introduced in July 2021 in response to the pandemic, the Fed’s facility provides twice-daily overnight cash loans in exchange for eligible collateral such as U.S. Treasuries.
The general collateral or GC repo rate, which is the cost of borrowing short-term cash using Treasuries or other debt securities as collateral, hit a high of 4.36% on Wednesday, according to Curvature Securities. It closed the session at 4.12%. On Tuesday, the GC rate touched a peak of 4.32%, up from Friday’s 4.20%.
The rise in the repo was unusual, traders said, given that it is not a month-end or quarter-end, when repo rates tend to jump as banks pull away from acting as middlemen due to higher balance sheet costs required at those times for reporting purposes.
“This is just more signs that liquidity is slowly, but surely, decreasing. Nothing alarming yet, but if SRF is continuously tapped the Fed should pay even more attention,” said Jan Nevruzi, U.S. rates strategist at TD Securities in New York.
Fed Chair Jerome Powell has signaled that quantitative tightening “is likely to be done soon and this emphasizes the possible need to announce the end as early as the October meeting,” Nevruzi said.
Powell said on Tuesday the end could be approaching for the central bank’s long-running quantitative tightening, aimed at shrinking the size of its holdings.
“Some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates,” Powell said at a gathering held by the National Association for Business Economics in Philadelphia.
Analysts also said there is a large volume of Treasury settlements that need to be paid. On Wednesday, $40 billion in bills and coupons were due for payment, data on Treasury financing flows from Wrightson ICAP showed. On Thursday, there will be another $23 billion.
The U.S. Treasury has been aggressively issuing shorter-term debt, hitting record levels in the last few weeks, as it tries to reduce borrowing of longer-term debt and bring down yields on that part of the curve.
When new Treasuries are issued, investors such as dealers, banks and money market funds must pay cash to the U.S. Treasury on settlement day. This payment drains reserves and cash from the private sector and moves them to the Treasury General Account, which is the Treasury’s account at the Fed.
Fewer available reserves make it more expensive to borrow cash in the repo market, pushing rates higher.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Edmund Klamann)
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