Repo Rate Spike
In mid-September 2019, there was a significant spike in the overnight repurchase agreement (repo) rate. The repo rate reflects the level where lenders like institutional investors and banks will extend collateralized cash loans to borrowers to meet short-term funding needs. The spike in rates caught many by surprise, despite warnings by the dealer community over declining bank reserves. The consensus view is that a combination of low bank reserves, corporate tax payments and the settlement of the monthly U.S. Treasury auction caused a temporary shortage of cash in the system, forcing repo rates higher.
During the 2019 Repo Rate Spike, repo rates climbed well above the feds target: over 10%. This suggested that the Fed had gone too far with quantitative tightening and that banking reserves were scarce. To solve this, the Fed had to add liquidity to the markets.
Potential Causes:
- US Treasury was issuing large amount of treasury bills to fund federal budget/deficit
- Previously, the Fed was reducing it's balance sheet. It may have gone too fast
- Foreign Repo pool is a drain on reserves
- Banks were unable to lend into repo markets due to new regulations that required them to maintain higher reserve levels
Potential Implications:
- Asset/Stock prices seems to rise concurrently