Bloomberg News

Repo Rates Surge to Two-Year High Before Vote on Budget Deal

August 01, 2011

Aug. 1 (Bloomberg) -- Rates for borrowing and lending Treasuries in the repurchase-agreement market rose to a two-year high as Republicans and Democrats try to push through a deal to lift the nation’s debt limit and avoid a default.

The average level of overnight Treasury general collateral repo rates traded through 10 a.m. New York time with ICAP Plc, the world’s largest inter-dealer broker, was 0.32 percent today, up from 0.21 percent at the same time on July 29 and the highest since March 2, 2009.

Congressional leaders are working to push through a compromise sealed with President Barack Obama yesterday to raise the U.S. debt limit by at least $2.1 trillion and slash government spending by $2.4 trillion or more. The House plans votes today and the Senate may follow suit to consider the agreement reached during a weekend of negotiations that capped a months-long struggle between Obama and Republicans over raising the $14.3 trillion debt ceiling.

“Repo rates have remained high as the debt deal is not done yet,” said Alex Roever, head of short-term fixed-income strategy at JPMorgan Chase & Co. in New York. “The repo market was sloppy last week, and this morning the debt deal isn’t really locked down, so dealers likely don’t want to be long collateral or try to fund securities later today.”

Federal Funds

The average rate for overnight federal funds, known as the fed effective rate, was 0.11 percent on July 29, up from as low as 0.06 percent from July 12 through July 26, the lowest level this year. That compares with the central bank’s target rate for overnight loans between banks of zero to 0.25 percent. The rate opened at 0.15 percent today.

Money market rates held near historic lows for most of this year as the budget stalemate and the Federal Reserve’s debt purchases have reduced the amount of Treasuries available for borrowing and lending in the repo market. In February, the Treasury eliminated $195 billion in Supplementary Financing Program bills, or SFPs, it sold on behalf of the Fed as it sought to help avoid exceeding the U.S. debt limit.

Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate are called general collateral. Those in highest demand have lower rates and are called “special.”

Repo Market

The average rate for borrowing and lending Treasuries for one day in the repo market was 0.208 percent on July 29, according to index data provided on a one-day lag by the Depository Trust & Clearing Corp. That was up from 0.132 percent the day before and a low of minus 0.005 percent this year on July 29.

The DTCC index is a weighted average of all general collateral repo transactions during a day. The DTCC processes about $3.6 trillion in repos transactions daily.

‘Extremely Dislocated’

“Despite congressional and Senate leaders being on the brink of pushing through a compromise to raise the debt ceiling, which would alleviate a significant amount of the uncertainty, the repo market still remains extremely dislocated,” said Kenneth Silliman, head of short-term rates trading at TD Securities Inc. in New York. “Money market investors have apparently been shifting away from bills and repo, which usually represent the most liquid money market assets in the world, and are keeping a significantly large portion of their liquid cash in bank deposits.”

Rates on Treasury six-month bills set to mature Aug. 4, just after the Aug. 2 deadline for when the U.S. would exhaust its ability to borrow if a debt-agreement isn’t reached, fell three basis points to 0.20 percent, according to Bloomberg Bond Trader data. The bills are the first government debt securities to mature after the deadline.

The one-month Treasury bill rate traded at 0.147 percent today, down from 0.167 percent on July 29. The rate was negative as recently as July 18 on a closing basis.

Negative bill rates mean investors are willing to pay the government to hold their money, protecting them from the potential losses of other investments.

--Editors: Dennis Fitzgerald, Greg Storey

To contact the reporter on this story: Liz McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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