General Collateral Rate Surges To Highest Level In 7 Years

Tyler Durden's picture

In what may be an indication of a major collateral shortage, but most likely is simply a case of quarter-end "window dressing", the overnight general collateral rate soared to 0.82% this morning, its highest print in nearly seven years, and roughly where it would trade if the Fed had hiked in September. GC soared to 0.85% yesterday afternoon yesterday after opening at around 0.68%.

As SMRA points out, the GC rate often spikes as quarter end approaches. The early morning fed funds rate is at 0.40% this morning, unchanged from 0.40% yesterday. Both the effective fed funds rate and overnight bank funding rate were in line with the fed funds rate at 0.40% on Monday, unchanged from the prior couple weeks.

It wasn't just general collateral surging. As the Fed announced eariler today, in today's fixed-rate reverse repo, 59 counterparties parked $272.3bn in cash in exchange for with the Fed in what by Sept 30 - or quarter end - will likely be the highest reverse repo use of the year by the final day of Q3 as the cumulative totals typically peak on the last day of the month and, in this case, quarter.

This is how Wedbush's Scott Skyrm explains the surge in both GC and RRP:

On a typical quarter-end, there's funding pressure driving Repo rates higher and a decreased supply of "specials," making it harder (more expensive) to cover shorts. In this pre-quarter-end period, there's only been funding pressure. This leads me to believe the current situation is driven solely by investor cash leaving the market (and going into the RRP).

 

So here's my interpretation of what's going on: Banks cut back on their balance sheets more aggressively for the quarter-end beginning last week. Cash investors, who normally send much of their cash into the Repo market, were forced into the RRP. As each day went by, more cash was pushed into the RRP. Less investor cash in the market with the same amount of collateral means Repo rates move higher and thus the reason for the funding spikes beginning yesterday.

Curiously the spike today takes place on the same day 3M Libor had an unexpected, and sharp drop, falling to 0.8377% vs 0.8538%, the largest decline since June 24.  According to CA, while easing of worries about Deutsche Bank may be abating some concerns about financial stress, helping FRA-OIS spreads tighten, the reasons behind the lower libor are "less clear."

We expect they will become more clear after quarter end when the window dressing overhang is removed. If these repo, GC and funding market abberations persists into Q4, then some more probing questions will have to be asked. For now, however, we like everyone else, can only observe the strange occurences in the markets without an ability to attribute causality aside from saying that this is what happens in a centrally-planned market.

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dot.dot's picture

Move on.  Nothing to see here.

back to basics's picture

So this is why the DOW surged today around 2pm on no news.

Oh wait.....

 

 

 

remain calm's picture

tick....tick....tick..........KAA BOOM

f_symbols's picture
f_symbols (not verified) seek Sep 28, 2016 4:11 PM

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Stormtrooper's picture

No, DOW surged because Arabs agreed to cut oil production, drive up gasoline prices and reduce cash in consumer pockets to buy, buy, buy our way out of depression.  Just more upside-down logic on Wall Street.

Consuelo's picture

 

 

"No more games ---- NO MORE GAMES...!!!   We are here for a purpose..."

stocktivity's picture

So I take it the spike today is all bullshit.

Jim in MN's picture

Canary twitches.

buzzsaw99's picture

WINDOW DRESSING, BECAUSE FRAUD IS SUCH AN UGLY WORD.

the grateful unemployed's picture

frog is such an ugly word, especially when its boiled slowly

2ndamendment's picture

Collateral ? We don't need no stinking collateral!

Iconoclast421's picture

WTF is general collateral rate. That term was rarely used in 2008.  In order to even find it, I had to search through papers like this:

http://www.webmeets.com/files/papers/SAEE/2010/482/JMP_Nathan_Foley_Fish...

 

Why is this of any significance now when it clearly didnt mean anything in 2008?

youngman's picture

I have a bunch of Copper in some warehouse in China....I think....

the grateful unemployed's picture

the end of the month surge in RRPO has to do with MM funds borrowing what they need to maintain NAV at par, thats why the fed opened this window, although 270b is more twice than what they paid the banks (105b) when they raised rates last december. bascially you're getting NIRPED if you're holding MM funds as real rates are a lot higher, but the fed knows what it is doing so they backed the amount of these reserves. investors may pull their cash out of MM if nominal rates remain low, the fed is setting up another MM crisis, the more they perpetuate the lie about rates the more people could pull out of these funds, causing a collapse, so the fed RRPOs enough to feed the NAV at par. no one in their right mind would accept current MM rates in the real world. funny because last december they used RRPO to hike rates which crashed the market and compressed rates and forced them to backstop MM, which allowed those rates to resume, but at a rate much less than inflation. thats the game always has been, staying behind the curve on inflation stokes the reach for yield

PTR's picture

I'm gonna get VERY fat on popcorn when all of this is said and done.