Overnight Repo Rates Dip, Remain Elevated
Yesterday, when we presented the latest update of overnight General Collateral rates (and when we said it was time to close the long-GC trade at its 2013 highs), we showed that on the day when there was a likelihood the US would enter the X-Date period without a debt deal in place potentially jeopardizing the sanctity of short-term bills, GC jumped to 0.32%, the highest in all of 2013. Moments ago ICAP, via Stone mcCarthy, released the latest repo data, and we can see that while GC has dropped substantially from recent levels, at 0.20% where it was as of 8:30 am, it is still notably elevated, especially in light of the collateral shortage that developed starting in May when GC was trading in the sub 0.10% area for the bulk of the time.
Which once again begs the question: is the delayed renormalization in repo rates merely a function of market adjustment, or, now that the can kicking exercise seems to be a quarterly event and where the default risk has merely been shifted from October to February Bils, will GC now remain structurally higher for the indefinite future, in the process impairing countless money market funds, not to mention the trillions in funds that flow through the shadow economy on a daily basis?
We will keep a close eye on this as this may be the most important artifact resulting from the what now appears terminal dysfunction in Congress, and which is starting to impact if not long-dated paper, then certainly short-term and overnight funding sources.
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