Overnight Rates at Next to Nothing

Investors and lenders squeezed as level drops to lowest since end of 2009.

Treasuries are in such short supply in the $4.9 trillion-a-day repurchase agreement market used by bond dealers to finance their holdings that investors are lending cash for next to nothing to obtain the securities.

The average level of overnight general collateral repo rates traded through 10 a.m. New York time with ICAP Plc, the world’s largest inter-dealer broker, was 0.04 percent yesterday. The rate fell to as low as 0.01 percent on May 5 and is down from 0.22 percent on Jan. 3. Rates haven’t been this low since they fell to 0.001 percent in December 2009 as banks sought to hold Treasuries on their balance sheets as the year closed.

Overnight rates have been below 0.1 percent since April 15 as the U.S. budget stalemate and Federal Reserve’s debt purchases reduced the amount of Treasuries available. The federal funds rate has traded at lower end of the central bank’s target range since the April 1 adjustment to banks’ Federal Deposit Insurance Corp. fees. The drop in rates is also cutting returns for holders of investments such as money market funds at a time when the Fed keeps borrowing costs at a record low.

“If anything the intensity of competition for money market assets is going to get greater,” said Alex Roever, head of short-term fixed income strategy at JPMorgan Chase & Co. in New York. “We are looking at zero or close to it for a while. This becomes an issue in the marketplace and makes it harder for investors.”

Treasury Bills Bill supply has slid since February after as the Treasury eliminated $195 billion in short-term debt it sold on behalf of the Fed to help avoid exceeding the U.S. debt limit. Treasury Secretary Timothy F. Geithner said last week that the U.S. can borrow until Aug. 2 after reaching the $14.29 trillion limit because of stronger-than-expected tax receipts and by taking extraordinary measures such as suspending the sale of bonds to finance state and local infrastructure projects.

The amount of bills outstanding may drop by $155 billion to $1.48 trillion by June 30, according to JPMorgan estimates.

Six-month Treasury bill rates dipped to a record low of 0.0305 percent on May 6, and traded at 0.071 percent yesterday. The rate on three-month bills was 0.025 percent, compared with 0.1197 percent at the start of the year. One-month bill rates were little changed at 0.005 percent.

The Treasury sold $27 billion in six-month bills on May 9 at a rate of 0.065 percent, the lowest on record. It also auctioned $29 billion in three-month bills at a rate of 0.025 percent, the least since December 2008.

Fed Funds Rate “Money funds, who collectively own $320 billion in short- duration Treasuries and $450 billion in repo, have been especially hard hit by the plunge in interest rates since the start of the month,” said Joseph Abate, money-market strategist at Barclays Plc in New York. “There has been some modest asset reallocation away from repos in prime funds toward bigger stakes in foreign bank deposits and commercial paper. But as bill and repo rates have fallen, commercial paper and deposit rates have also come down.”

Fed officials haven’t expressed concern about the low rates. The average rate for overnight federal funds, known as the fed effective rate, averaged 0.09 percent over the past month, within the central bank’s target rate for overnight loans between banks of zero to 0.25 percent.

“There is an acute shortage of Treasuries in the repo market,” said Scott Skyrm, senior vice president and head of repo and money markets for NewEdge USA LLC in New York. “The market is equally awash in cash as it is short of collateral. Even though the federal funds rate remains within the Fed’s target range, there is still a major dislocation in the general collateral repo market.”



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