- Something odd just happened in U.S. short-term funding markets: a benchmark interest rate suddenly fell precipitously on March 19 before bouncing back up the next day.
The trade was odd as the bulk of repo market activity happens in the morning. A big investor was likely stuck with a huge amount of cash and needed to get it off its books, the sources said. They attributed it to bad collateral management. Short-term funding markets are crucial to Treasuries and global finance, and disruptions there can have broad ramifications, including for financial stability. They, however, tend to be secretive, with even regulators sometimes struggling to understand what goes on there.
The trade happened around the time the New York Fed conducts its reverse repo operations, where money market funds, government sponsored enterprises and banks can put up cash with the Fed, the sources said. The Fed has been paying 5.3% for overnight funds, much higher than the rate the investor got in the large trade on March 19.
To be sure, the trade may not have any broader implications. One of the market sources said such incidents happen from time to time. The Treasury GCF repo index, for example, saw a similar one-day drop on July 8, 2022, when it fell to 1.176% from 1.55% the previous day before bouncing back.
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