While there has been no move in its close cousin, the Fed Funds rate, which actually declined sharply into quarter-end from yesterday's 0.12% print to just 0.03% following a pattern observed in recent quarters when the FF plunges at quarter end just to rebound to its 0.12%-0.13% range...
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... it is what is going on in the far more important (in a world in which Fed Funds is irrelevant courtesy of $2.6 trillion in Fed reserves sloshing around) General Collateral rate that has bond market experts such as Stone McCarthy [4]stumped. To wit:
The overnight general collateral rate jumped to 0.38% this morning. The GC rate has seen sharp moves at quarter end in the past, although today's jump is the largest we have on record. We do not have a definitive explanation for today's movement, but if any of our readers have an explanation, please let us know.
This is what the largest "on record" jump in GC looks like.
So while SMRA may be stumped, Bloomberg has some ideas, and suggests that the Treasury GC repo trading around 50bps/35bps at quarter-end is due to regulations forcing largest banks to hold more collateral on their balance sheets. Further, mortgage repo traded as high as 70bps, according to TD Securities.
Bloomberg quotes Citi strategist Andrew Hollenhorst who said that higher repo rates indicate “the marginal cost of banks’ unwillingness to expand their balance sheets." "It’s more of an interdealer phenomenon than for cash investors, though they may see rates move a little higher in sympathy."
Looking elsewhere at money markets, MM funds have had access to ~$500b in quarter-end collateral via Fed’s O/N, term RRP operations, part of the infamous liquidity quarter end window dressing have discussed extensively in the past [5].
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In other words, while the move in GC is huge, it should normalize tomorrow. Then again, the question remains: just how big is the structural collateral shortage if discontinuities like quarter-end reflect a huge market imbalance between market clearing when everyone rushes to satisfy their regulator, and further begs the question: if banks only satisfy regulatory requirements on just one day of any given quarter, what would happen to the banks if something "unexpected" happened on any of the 89 or so other days during the quarter that don't happen to fall on month-end?