“Nobody Knows What’s Going On”: Repo Market Freezes As Overnight Rate Hits All Time High Of 10%

Back in the summer of 2013, China’s banking system was on the verge of collapse when its overnight repo rates briefly soared to the mid-20% range, prompting the central bank to take emergency intervention to avoid a funding freeze.

  • Tyler Durden

As of this morning, the US is halfway there.

After we reported yesterday that “something snapped” as chaos hit the report market, and the overnight repo rate exploded as high as 7% for a variety of reasons including:

  • elevated UST supply,
  • bloated dealer balance sheets and year-end regulatory constraints
  • a banking system near reserve scarcity,
  • investors selling bonds back to dealers, and
  • banks and money-market funds to make their quarterly tax payment.

… on Tuesday this paniced funding shortage has intensified to never before seen levels, as overnight repo has now hit 10% and shows no signs of slowing.

While specific prints are scarce as the bid/ask spread is a massive 2% at last check, Reuters has GC repo at 10%, while Bloomberg’s own pricing sources show the key funding rate soaring by more than 600 basis points to 8.53%, based on ICAP pricing, after opening around 7%.

Putting this move in context, overnight GC repo has not only just had its biggest surge in history, but it is printing at the highest level in decades!

Not even the rates experts are stumped, with one STIR trader saying “nobody knows what is going on”, and desks are simply watching what appears to be a relentless dollar funding squeeze as one or more entities are in desperate need for funding and will pay any price for it (even though it is neither month nor quarter end yet).

As a reminder, commenting on Monday’s just as shocking move, BMO rates strategist Jon Hill said that “secured funding markets are clearly not functioning well,” adding that a jump like this, one which is not happening during the traditional quarter end window dressing period, is “bordering on chaos.”

It is thus safe to say that secured funding markets are now officially broken. …


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