Written by Paritosh Bansal
(Reuters) – Something strange has happened in the U.S. short-term funding market. The benchmark interest rate suddenly fell sharply on March 19, but rebounded the next day.
The decline, which has attracted little attention outside Wall Street trading desks, occurred in a corner of the repo market, where companies borrow money from investors against U.S. Treasuries.
On this day, the main repo rate, known as the U.S. Treasury GCF Repo Index, fell to 5.142%, significantly lower than the previous day’s 5.334%. Trading volume increased by $57.64 billion from $31 billion the previous day.
A review of three market participants and public trading data said the decline was due to a large single trade involving a major company later in the day. The deal, valued at a 5% rate in the mid-$20 billion range, took place just after 1 p.m., two people familiar with the matter said.
The trade was strange because most of the repo market activity occurs in the morning. The large investors were likely sitting on huge amounts of cash and needed to remove it from their books, the people said. They attributed this to improper collateral management.
Reuters was unable to provide further details about what happened, including the identities of the parties involved in the transaction.
This unusual transaction poses a mystery worth solving to ensure transparency in one of the world’s most important markets. Incidents may be suppressed because the market is functioning as intended, but information about what happened may provide important insight into the functioning of the market.
Short-term funding markets are critical to Treasurys and global finance, and disruption there could have far-reaching implications, including for financial stability. But they tend to be secretive, and even regulators can have a hard time understanding what’s going on there.
Darrell Duffy, a finance professor at Stanford University, said regulators are likely interested in what happened. “If it’s a deal this big and the conditions are like this, you have to be on your toes,” he said.
But Mr Duffy said there was no clear indication that this posed an “unreasonable risk to the financial system or fraud”.
Deposit clearing companies and the New York Fed, which publish general collateral repo rates, declined to comment. The Securities and Exchange Commission declined to comment.
The deal comes at a time when the New York Fed is conducting reverse repurchase operations, which allow money market funds, government-backed companies and banks to provide funds to the Fed, sources said. The Fed is paying 5.3% on overnight funds, far higher than the interest rate investors earned on the big March 19 trade.
If a transaction involves a government-backed company or money market fund, information about that institution’s risk management may be available.
Understanding what happened could also shed light on market structure and concentration risk. The fact that the deal was not done at such a low interest rate suggests that the investors behind the deal are important enough to banks to back them, two people familiar with the matter said.
To be sure, the deal may not have far-reaching implications. One market official said such incidents happen from time to time. For example, the Treasury GCF Repo Index had a similar one-day decline on July 8, 2022, falling to 1.176% from 1.55% the previous day before rebounding.
The March 19 trade had a limited impact on the overall market. Other benchmark interest rates based on market transactions, such as the Secured Overnight Loan Rate and the Broad General Collateral Rate, were not affected by this transaction.
It was still large enough to show up in transaction data. For example, when calculating the broad general collateral rate, the New York Fed publishes the interest rate at which transactions are made in percentiles.
The first percentile percentage on March 19 was 5%, down from 5.25% the previous day. By March 20th, he had recovered again.
(Reporting by Paritosh Bansal; Editing by Anna Driver)
