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While markets were in a festive mood on New Year's Eve, with the S&P enjoying a last second 15-point spike even as 10Y yields tumbled to the lowest level since January...
... something strange took place in both overnight funding markets and the Treasury market.
Dealers - Dress - Books - Day - Year
While it is well-known that dealers tend to "window dress" their books on the last day of the year by curtailing activity in financing markets to shore up balance sheets, what happened on Monday left quite a few mouths wide open: with the General Collateral rate trading around 2.50% on Friday, Monday saw a historic surge in overnight GC repo, that sent the rate surging by the most ever, spiking sharply to 6.125% on Monday morning, with the bid/ask trading 6.50%/5.75% just after 10am after opening Monday at 3.75%/4.00%, which was already nearly 1.50% higher than the Friday close (incidentally, the Broad General Collateral Rate (BGCR) was set at 2.45%, the same as the Tri-party General Collateral Rate).
In fact, the closing print of 6.125% was the highest GC repo rate observed since January 2001, and just under 400 bps higher than the Fed funds rate.
Cash - Scott - Skyrm - EVP - Curvature
"The cash never came in," said Scott Skyrm, EVP at Curvature Securities, noting that "funding pressure should be about 50 basis points. This was 350 basis points."
Indeed, confirming the need for cash, on the last day of 2018, 17 counterparties took only $41.8BN at the Fed’s overnight reverse repo operation on Monday, up from $3.21b on Friday, which was the second-smallest quarter-end usage since the RRP was created in 2013, and suggesting that instead of padding books with cash-equivalent securities to satisfy regulatory requirements,...
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