Short-term dollar funding is getting bumpy again—and the Fed is reportedly working behind the scenes to keep it from turning into a problem. The general collateral (GC) repo rate—the price banks and dealers pay to borrow overnight cash against Treasurys or other high-quality securities—has been trading above the top of the Fed’s target range even after the latest rate cut. Reuters reported that GC opened at 4.05% on Tuesday, five basis points above the Fed’s 3.75%-4.00% band, and jumped to 4.25% at the end of October, with bank reserves falling last week to about $2.8 trillion from $3.3 trillion a few months earlier.
At the same time, the New York Fed quietly pulled primary dealers into what the Economic Times described as a “secret emergency huddle” after banks borrowed a record $50.35 billion from the Fed’s Standing Repo Facility (SRF) in a single day, followed the next business day by a separate $22 billion repo operation taking Treasurys and mortgage backed securities as collateral. According to the Financial Times, that meeting was held on November 12 on the sidelines of the Fed’s annual Treasury market conference. Here’s what’s going on—and what to watch:
Liquidity is thinner—but not yet 2019-style fragile. Barron’s noted that while overall bank reserves are the lowest in four years, they are still more than double the roughly $1.4 trillion level that preceded the 2019 repo spike. Fed officials have talked about reserves moving from “abundant to ample”—and Reuters reported that Fed Governor Christopher Waller pegs “ample” at about $2.7 trillion, only a touch below the roughly $2.8 trillion level seen last week. In other words, there is still a cushion, although there may be less room for market shocks. One strategist told Barron’s that ending quantitative tightening in December should “reintroduce liquidity into the system in ways that support risk assets.”
The Fed’s backstop is getting more use—but stigma still bites. Banks and dealers have sharply increased use of the SRF—Barron’s put October borrowing at about $110 billion in total—yet they still hesitate to treat it as a normal tool. Bloomberg reported that primary dealers told Fed officials borrowing directly from the SRF still carries stigma and can be seen as a sign of trouble at their own institution, and that capital and balance-sheet treatment make SRF trades less attractive than some private repo alternatives.
Structural pressures are pushing repo rates higher. Reuters pointed to several forces squeezing overnight liquidity: larger Treasury issuance related to rising U.S. debt, a higher Treasury General Account after the long government shutdown, and the drawdown of cash that had been parked in the Fed’s reverse-repo facility. Hedge funds have also ramped up levered Treasury trades—one strategist estimated their long positions rose by nearly $400 billion to $2.4 trillion in the first half of the year, with repo funding up almost $700 billion and more than twice 2019 levels.
The risk is the chain reaction. As the Economic Times reported, if short-term funding costs continue rising, banks may retreat into cash preservation and cut back lending—moves that can amplify stress across markets. “Repo is all about trust,” Thomas Simons, chief U.S. economist at Jefferies, told The Financial Times. “If any borrower gets the reputation of being riskier, it creates this perverse incentive for all the lenders to pull back at once, even if it is not deserved.” Once that happens, he said, “it’s hard to recover.”
