The unwillingness of the top four U.S. banks to lend cash combined with a burst ...
LONDON - The unwillingness of the top four U.S. banks to lend cash combined with a burst of demand from hedge funds for secured funding could explain a recent spike in U.S. money market rates, the Bank for International Settlements said.
That forced the Fed to make an emergency injection of billions of dollars for the first time since the global financial crisis more than a decade ago. The repo market underpins much of the U.S. financial system, helping ensure banks have liquidity to meet their daily operational needs. But in late September, interest rates shot up to as high as 10% for some overnight loans, more than four times the Fed’s policy rate, raising concerns about the fragility of U.S. dollar funding markets.After the U.S. Federal Reserve began to run down its $4 trillion plus balance sheet from October 2017, banks’ cash reserves at the Fed also contracted, while their holdings of U.S. Treasuries grew rapidly, the BIS said.
The repo rate rose to an intraday high of about 700 basis points, with some trades reportedly occurring at up to 10%. That rush for short-dated secured funding was exacerbated by hedge funds who had ramped up their Treasury repos to fund arbitrage trades between cash bonds and derivatives.
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