U.S. repo rates spike, Fed steps in to restore balance
Overnight repo printed near 10% amid quarter‑end cash frictions and supply, prompting the Fed to conduct operations and later expand its balance sheet. We kept ample liquidity, shortened spread duration, and added T‑bill exposure.
A confluence of corporate tax payments, Treasury settlement, and balance sheet constraints drove a sudden funding squeeze. The overnight rate surged, and market participants scrambled to source cash. The New York Fed conducted repo operations to cap rates, signaling willingness to manage reserves and restore control of money market conditions.
The episode highlighted sensitivity to reserve levels post‑balance sheet runoff. Ultimately, the Fed resumed T‑bill purchases to rebuild reserves, distinguishing the move from QE. Funding markets normalized, but debate persisted over structural facilities versus ad hoc interventions to mitigate future frictions at quarter‑end and tax dates.
Credit spreads held steady overall, though dealers prioritized balance sheet usage. We saw limited transmission to broader risk assets given rapid policy response. T‑bill supply expansion offered an opportunity to park liquidity at attractive yields relative to risk, while avoiding extension into more volatile spread products.
We preserved higher cash balances in multi‑asset mandates, added T‑bills, and trimmed repo‑sensitive carry trades. In credit we shortened spread duration and focused on high‑quality issuers. We maintained flexibility to redeploy once reserve adequacy and facility design reduced recurrence risk.
- Repo squeeze underscored reserve sensitivity
- Fed operations stabilized funding
- We held cash, added T‑bills, cut spread duration
