Repo Soars To 2013 Highs On Default Fears, Bifurcated Collateral Market

While stuff like soaring Bill yields, the threat of Money Market funds breaking the buck, and the gradual phase out of near-term money equivalent collateral thanks to the complete dysfunction in Congress which has managed to breach the repo market into "good" and "bad" Bills, may be too arcane to the various JPY-correlating, ES-ramping algos, those who care about real signals, now that the US flirtation with the X-Date is hours ago may be interested to know that according to ICAP, as reported by Stone McCarthy, overnight General Collateral, the key rate in the determination of collateral pricing for trillions worth of assets, just exploded once again and in following the surge in Bill cash rates, hit 0.32%, the highest since December 7. Indicatively, at 0.32%, GC is now well above both overnight LIBOR (10.69 bps) and the Fed Funds rate (10 bps).

This is how Stone McCarthy explained the latest jump:

Fed funds opened at 0.10% for the fifth consecutive session this morning, and yesterday's Fed funds effective rate was unchanged at 0.10%. Prior to Friday, it had held between 0.07% and 0.09% every day since June 18th except for the September 30th quarter-end of 0.06%. However, although Fed funds have been steady, the overnight GC rate jumped again, to 0.32% in today's early morning reading, which is the highest since December 7, 2012, as players react to the debt ceiling crisis.

More importantly, since this surge was just as we predicted would happen in our second, still open debt ceiling-related trade reco from October 7, "With A Looming Debt Ceiling X-Date And Still No Deal, Here Is Another Trade Idea", in which we suggested to go long collateral rates (when GC was < 10 bps), it is now time to close with a pick of 24 bps as the logical worst case scenario, an actual US default, would likely mean wiring and funding transactions would halt at all banks, and all profits would be left on the table... so to say. 

And now we sit back and wait for today's 4-Week Bill auction in a couple of hours which should conclude this morning's dose of firework festivities.


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