By Katy Burne
The cost of borrowing cash overnight in exchange for U.S.
Treasurys spiked on Tuesday to the highest level since the
financial crisis, the latest sign that securities dealers are being
squeezed by changes in short-term debt markets.
The cash-for-Treasurys trades, known as repurchase agreements,
or repos, are short-term loans in which government bonds or other
high-quality securities are used as collateral.
Dealers, including banks and independent firms, use the cash
they get in repos to finance their day-to-day operations. They also
stand as middlemen on the trades, matching lenders such as
money-market funds with borrowers who need financing, such as hedge
funds.
The repo market has been subject to increased regulatory
scrutiny since the demise in 2008 of Bear Stearns Cos. and Lehman
Brothers Holdings Inc., which were presaged by difficulties in the
short-term financing markets.
In recent months, new regulations have caused dealers to dial
back their presence in low-margin businesses like repos, notably at
quarter-end, analysts and traders said. That is creating a
bottleneck in the repo market, which has long greased trading in a
range of other bonds.
On Tuesday, interest rates on overnight repos backed by U.S.
Treasury debt averaged 0.50%, according to prices from broker ICAP
PLC. That was the highest since November 24, 2008, when it spiked
to 0.59%, the ICAP i-Repo index shows, and was up from a recent
high of 0.26%.
The repo cutbacks by dealers have been especially prominent at
quarter end, because that is when they and others seek to reduce
bondholdings for regulatory-reporting reasons. While the cost of
repo borrowing has risen at the end of previous quarters, the jump
seen Tuesday was especially sharp.
"We have seen escalating distortions on month-end and
particularly quarter-end dates because of new capital regulations
and balance-sheet constraints," said Lou Crandall, chief economist
at Wrightson ICAP.
Garrett Sloan, fixed-income market strategist at Wells Fargo
Securities LLC, said banks likely were paying up to access the repo
market on Tuesday, because in that market they can cancel out, or
net, down their positions in repos for complying with the capital
rules.
Repo rates for investors like hedge funds also were elevated on
Tuesday, he said, rising to 0.12% to 0.15% from 0.10% to 0.12% for
the remainder of March.
The pullback in bank repo books at the end of this month left
participants who needed to borrow cash "with few options--and those
options are expensive," said Joseph Abate, money-markets analyst at
Barclays PLC.
The Federal Reserve offers an alternative repo program to help
alleviate pressures in repos when banks are repositioning their
books. Tuesday's Treasury-backed overnight repo rate was the
largest premium over that Fed program rate since testing of the
program began in September 2013, said Abate.
Tuesday's Fed overnight repo program drew $202.2 billion of
orders, according to data from the Federal Reserve Bank of New
York. That is up from $171.12 billion of overnight repos on Dec.
31.
There are now $378.5 billion in repos outstanding in the Fed's
program, on par with the $396.7 billion as of year-end.
Write to Katy Burne at katy.burne@wsj.com
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