Now that the long overdue (and predicted) contagion from the cash market has hit repo, things are going from bad to horrifying. Following overnight news that HK is hiking haircuts on Bill collateral, and with increasingly more counterparties now segregating what collateral is eligible, if not shutting down the bill market outright, suddenly the universe of eligible repo market securities has imploded. It also means the overnight repo rate, as we said on Monday would happen, is exploding. Moments ago ICAP reported, via SMRA, that the general collateral overnight rate has nearly doubled from 0.15% to 0.27% and rising.
To wit from Stone McCarthy:
The overnight GC rate has been surging due to the debt ceiling risks, and that continued this morning as the rate surged to 0.27%. That is the highest the early morning GC rate has been since April 12th. Fed funds opened at 0.10% for the second consecutive session. Prior to yesterday, it had traded at 0.09% early every morning since September 9th except September 30th ahead of quarter-end. Yesterday's Fed funds effective rate was 0.09%. It was 0.06% for quarter-end, but outside of that it has held between 0.07% and 0.09% since June 18th.
And while the bond market is batting down the hatches and preparing for the worst, stocks are once again soaring on regurgitated non-news from 5 days ago.
Meanwhile T-Bill yields escalate: