US Overnight Interest Rate Surges to 10%, Fed Injects Emergency $75 Billion

-edited

Overnight interest rates surged to 10% and no one understands why.

What's Going On?

Bloomberg reports Overnight Funding Rate Surges to Record Levels.

U.S. money-market interest rates surged for a second day Tuesday as cash reserves in the banking system remained out of balance with the volume of securities on dealer balance sheets.

Amid the squeeze, the effective fed funds rate rose to 2.25%, in line with the top of the Federal Reserve’s target range of 2% to 2.25%.

The rate on overnight general collateral repurchase agreements soared by more than 600 basis points to 8.75%, based on ICAP pricing, before settling back around 7.25%. Surges are commonplace only around quarter- and month-end, so market participants had expected things might return to normal.

On Monday, the rate on overnight GC repo soared by as much as 248 basis points to 4.75%, the highest level since December, according to ICAP pricing, amid the settlement of Treasury coupon auctions and the influx of corporate quarterly tax payments, possibly aggravated by last week’s bond-market selloff, in which investors sold securities back to dealers.

Separately, the Secured Overnight Financing Rate, which is backed by overnight GC repo transactions, rose to 2.43% Monday from 2.20%, New York Fed data show. That’s the highest since July 31.

Federal Reserve Injects $75 Billion Into Financial System

The Financial Times reports Federal Reserve Injects Billions of Dollars Into Financial System

TD securities points the finger at bank reserves.

We think that the culprit is the scarcity of bank reserves, which are the only asset that provides banks with intraday liquidity. Reserves have been declining since 2014 and we expect them to decline further as Treasury’s cash balance increases and currency in circulation grows.”

The Fed seems to have fixed whatever the problem was with the $75 billion injection. Repo rates are back down, for now.

Technical Factors

A reader commented: "Analysts said there were technical factors squeezing the repo market rather than the systemic issues that drove overnight rates much higher during the financial crisis. Now what are the technical factors?"

Sometimes there is an end of month squeeze but this happened on Sept 16 and again September 17.

"This mid-month surge was attributed to a confluence of events that knocked cash reserves in the banking system out of balance with the volume of securities on dealer balance sheets: a corporate tax payment date, settlement of last week’s Treasury auctions, and last week’s bond-market sell-off, in which investors sold securities back to dealers."

Chris Whalen Chimes In

Still Crazy After All These Years

China Theory

Quadruple Witching

We also have Quadruple Witching on Friday.

Quadruple witching refers to the third Friday of every March, June, September and December. On these days, market index futures, market index options, stock options and stock futures expire.

Wall Street Journal Chimes In

The Wall Street Journal reports Fed Steps Into Repo Market to Control Soaring Rates

Scott Skyrm, a repo trader at Curvature Securities LLC, said he had seen cash trade in the repo rate as high as 9.25% Tuesday. “It’s just crazy that rates could go so high so easily,” he said.

On his trading screens, Mr. Skyrm said he could see traders with collateral securities that they were trying to exchange for cash. The rates they were offering would start to rise until an investor with cash available to trade would start to accept their bids, gradually driving repo rates down until investors had exhausted their cash, he said. Then rates would resume their climb.

While there are technical factors to explain why cash would be in high demand this week, including corporate tax payments, the settlement of recently issued Treasury securities and the approach of quarter-end, they didn’t seem to explain the “crazy market volatility,” Mr. Skyrm said.

It seems like there’s something underlying out there that we don’t know about,” Mr. Skyrm said.

Bottom Line

Someone was in serious need of cash and got it.

Mike "Mish" Shedlock

Comments (44)
No. 1-31
Sechel
Sechel

Analysts said there were technical factors squeezing the repo market rather than the systemic issues that drove overnight rates much higher during the financial crisis. Now what are the technical factors?

Mish
Mish

Editor

Technical factors - can't find them Sometimes there is an end of month squeeze but this happened on Sept 16 and again September 17.

We do have quadruple Witching on Friday

FromBrussels
FromBrussels

maybe AI 'detected' something,....something invisible to the human eye after a decade of mad, manipulative manipulation of the system trying to resolve too much debt by creating more debt....Extraterrestrials would scratch their heads while observing us .....and maybe AI is doing the same.....hopefully..

Stuki
Stuki

Another day, another excuse, anther bailout..... What else is new? Except another round of war posturing against another hobgoblin? As always imaginary, of course.

Sechel
Sechel

I can appreciate the stepping in with liquidity in situations like 2008, 1907(pre Fed) but its overkill. For a country that prides itself on free market capitalism we seen insistent on fixing the price of money

abend237-04
abend237-04

If I were bugshooting it, I'd look first at who made the most money on the swing, then I'd look at how they executed it. Algos would be my guess.

Bam_Man
Bam_Man

You see what happens when EVERYTHING is leveraged 50:1, 60:1, 80:1? It will only get even more surreal from here.

Mish
Mish

Editor

Just added a Tweet on the China theory

Bottom line conclusion still remains

Matt3
Matt3

Why is the repo market needed? What drives the need for funds? I thought banks reserves were ok as banks seem to be offering loans at low rates and the last few weeks saw a lot of corporate bonds sold at low rates. Please explain.

Roger_Ramjet
Roger_Ramjet

Well, when your strategy is to manipulate global debt and equity markets 24/7, things like this are bound to happen.

Sechel
Sechel

Sounds like everyone just discovered they were all on the same side of the market and were a counter-party to each other. The financial industry likes to pretend they are big risk takers and prudent takers of risk but this morning we had a panic in the bond market. Maybe not a 1907 size panic but one none-the-less and once again the Fed had to step in...again. Never mind that when someone says regulation these same babies scream and cry. Seems bankers and traders are like little children who when they see candy and chocolate insist they can control themselves but in reality will eat it it all up till they puke all over themselves and then cry for mommy and daddy.

Ishan
Ishan

The n-sigma oil move after the saudi drone attack definitely broke someones VaR model... Expect some big bankruptcy(s) over next ten days, possibly in europe, if the move doesn't mean revert quickly enough

Sechel
Sechel

"We believe the pressure in repo is mostly related to balance sheet scarcity rather than reserve scarcity.

Took me a moment to parse this. So if we are to believe Whalen the banks are solvent but not liquid and the Fed fills that role instead of the market

Mish
Mish

Editor

Added more comments from WSJ - refresh to see

Jackula
Jackula

Investors in the PRC or Hong Kong?

Augustthegreat
Augustthegreat

Some hedge funds shorting crude oil got busted by the Saudi oilfields bombing. They need cash to settle their margin calls

mark0f0
mark0f0

Yield curve inversion always destroys capital in the financial system as there is a negative carry between short term liabilities and long-term assets. So its logical that there are now confidence issues. This will only continue to get worse. Banks cannot survive without low interest rates. And the ability of central bankers to lower them even further is rather limited.

Tony Bennett
Tony Bennett

The latest iteration of debt ceiling nonsense resolved (for a couple of years) in July.

In the past till deal passed US Treasury has had to raid its piggy banks to pay Fedgov's bills. Didn't bother to look this time, but in prior debt ceiling run ups had to dip into accounts to the tune of $hundreds of billions. Expect a few more months of Treasury sucking up cash to restock piggy banks.

ksdude69
ksdude69

Quit the ludicrous and overly complicated system when you think about it. Hopefully there isn't anything really serious(haha) anytime soon and we need some sort of "distraction".

Webej
Webej

Whalen has been talking about the dearth of collateral at the heart of the system for years, so he is not flying by the seat of his pants. Jeff Snider has also emphasized the shortage in non-bank synthetic dollar funding for a long time. But these are of course symptoms ... the debt pyramid is very much like a junk who constantly needs to shuffle loans, gifts, and winnings in his "network" everyday to solve his everyday repeating cash flow crises. The real assets in this house of cards are a lot like the guy who has loaned $1000 bucks from 19 acquaintances, friends, and family, pledging his aging car as collateral again and again (rehypothecation). Juggling is hard when you need to keep it up 24/7.

Country Bob
Country Bob

Its kind of obvious that none of the people commenting here ever worked on the funding desk of a real bank.

Its like reading college professors talking about how the financial markets work, even though they have never held a job off campus never mind on a trading desk. Oh, but they wrote a research paper! And they went to the library! They collected data.

Reading about sex and collecting data is not the same as actually having sex. They are still virgins

FloydVanPeter
FloydVanPeter

There was a time that $75B injection would rattle us all...

FloydVanPeter
FloydVanPeter

Who could desperately need $75B overnight?!

Heck. $75B would suffice to bank roll some countries for a whole year.

Herkie
Herkie

Interest rates are inverse to price, so it is unlikely that demand caused it but rather an urgent trade out of debt at pretty much any price. That will skyrocket rates. And because of the attack on Aramco facilities you can't blame someone for getting nervous, but this is not even nervous, it is panic. Perhaps setting the stage for a bond market collapse? Maybe someone knows something about a retaliatory attack in the works?

Freebees2me
Freebees2me

Move along folks.....nothing to see here....move along, come on, move along....

Herkie
Herkie

There actually is a good story about this at Yahoo Finance, of all places. Not sure I believe it, but it did make sense.

What it mostly boiled down to was that interest rates are too low to attract enough reserves available for the repo market, calling into question the Fed's ability to lower rates, so they pumped in $75 billion, and another story there says that the funding will continue Wednesday. What this means for the predicted rate cut, well Mish has another post about that.

One thing to note is that the auction held this morning only generated interest for $53 billion of the 75 made available. "But others said concerns over Fed credibility may be overblown, as the spike in interest rates appears to be the result of a temporary flurry of financing needs associated with the timing of corporate tax payments and Treasury auctions."

This is why I am suspicious though: "In the case of spiking repo market rates Tuesday, borrowers were looking to cover corporate tax payments and settlement of newly auctioned U.S. Treasuries. With bank reserves hard to come by, some dealers were paying as much as 10% for repo agreements on Tuesday."

Maybe true, but if it is then there is some very sloppy planning going on given that those federal auctions and Treasury moves are published well in advance.

MadDenker
MadDenker

Ever take down an economy? Go watch the movie Rollover again. [70s]

Sechel
Sechel

Apparently the Fed is readying a second 75 billion. Are we back to Q.E.?

leicestersq
leicestersq

I am wondering if this is due to the reversal in interest rates. If leveraged buyers bought bonds at negative yields, and the price of the bond then fell, would they need cash? Would a lot of leveraged buyers need cash?

I am not sure of my own question, but it is the best line of thought that I can come up with on this.

Sechel
Sechel

Markets usually panic when something unanticipated happens. Hard to see how any of the explanations offered fits that as these are all known events the market should have forseen

George_Phillies
George_Phillies

The Fed did this again on the next day, some more the day after, and is apparently preparing to do $75 billion this (Friday) AM. It seems peculiar. Bloomberg is covering the tale.