Federal Mortgage: Replacement of Fed-backed Libor to SOFR Holds Lower Amid Flurry of Cash and T-Bill Volatility
NEW YORK, Oct.21 (Reuters) – The US Guaranteed Overnight Funding Rate (SOFR), the Federal Reserve’s preferred Libor replacement which measures the overnight cost of liquidity in the repo market ( repo), remained at 0.03% for the second year in a row. day after remaining at 0.05% for the past four months.
Analysts attributed the unexpected drop to recent volatility in short-term treasury bills and excess cash flow from government-sponsored companies (GSEs).
The current SOFR number reflects Wednesday’s rate. The New York Fed releases SOFR every business day at 8 a.m. ET.
The drop to 0.03%, which started on Tuesday, was unusual and surprised market participants. The SOFR had been at 0.05% since June 17, a day after the Fed raised the repo rate and the excess reserve interest rate, in an attempt to prevent its overnight key rate. day of falling too low.
Repo rate cut follows an increase in short positions on short-term Treasuries, analysts say, as expectations rise for a Fed rate hike earlier than expected next year . To sell 2-year notes, for example, investors borrow them from entities such as money market funds, sell them and buy them back later.
These US 2-year notes have become what are known as “repo specials”, referring to securities that are in overwhelming demand in the repo market. Competition to buy or borrow a special security prompts potential buyers to offer cheap money in return.
On Thursday, US 2-year bonds traded the most “special” among Treasury securities, with loan repo rates at -1.56%. Market participants were willing to pay interest on the money loaned to borrow the 2 year note, instead of the cash borrower who typically pays interest on the loan.
Additionally, on the 18th of each month, GSEs like Fannie Mae and Freddie Mac invest money in the repo market because they receive mortgage payments from homeowners. This generally lowers pension rates. When they make their principal and interest payments on the 24th, that GSE money leaves the market, pushing up repo rates.
“The drop in SOFR raises questions about the stability of the rate which will become the new benchmark in US dollars once the libor wears off,” said Dan Belton, fixed income strategist at BMO Capital in Chicago.
“Many investors were skeptical about the rate initially, mainly because of its lack of a credit component. For example, the fact that it may so far fall within the Fed’s target range of just 3 basis points from the bottom, and unexpectedly, adds to questions about the gaps in the rate as a benchmark. ” (Report by Gertrude Chavez-Dreyfuss in New York edited by Alden Bentley and Matthew Lewis)