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Chart of the Month |
Strange Happenings in the Repo Market

October 2, 2019  | by Ivo C. Nenin, Ryan Driscoll

Market Commentary

An obscure but very large part of the financial markets caused a stir in late September. Lending rates spiked in the repurchase (repo) markets as institutions sought short-term liquidity. The rate for general collateral repurchase agreements reached a record high (light blue line) versus the overnight bank funding rate[1] but quickly retreated as the Federal Reserve acted to calm the markets by injecting liquidity (black dots). If left unchecked, the escalation in rates could have done damage to the broader economy by hiking borrowing costs for companies and consumers. Several theories about what caused the liquidity crunch have been floated: large new issuance settlements on already bloated bank balance sheets, a tax payment date forcing entities to source temporary liquidity or, perhaps it was the Federal Reserve’s smaller balance sheet leading to less liquidity in the markets. Regardless, the market consensus is that this dislocation is not a liquidity crisis. Ultimately, the Fed may again have to grow its $3.8 trillion balance sheet through debt purchases that create fresh reserves. Chairman Jerome Powell said the Fed took appropriate actions to resolve the near-term funding pressures, adding that they have the necessary tools, and will use them as needed.

Chart of the Month | Strange Happenings in the Repo Market

[1] The overnight bank funding rate is calculated by the New York Fed from daily transaction data including federal funds and certain Eurodollar and domestic deposit transactions maturing the following business day. It is a measure of wholesale, unsecured, overnight bank funding costs. The broad general collateral rate is a measure of rates on overnight Treasury general collateral repurchase agreement (repo) transactions where securities (U.S. treasuries and agency debentures, MBS and CMO) are pledged as collateral but not identified until after other terms of the trade are agreed.

Authors

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Ryan Driscoll is a member of the Commonfund Asset Management Investment team and is primarily responsible for investment monitoring, rebalancing and reporting for investment portfolios with a focus on operating assets. Prior to joining Commonfund, Ryan worked at Sailfish Capital Partners, a multi-strategy fixed income fund, where he served on the Emerging Markets team. Prior to that, he was on the fixed income team at Grantham, Mayo, Van Otterloo & Co. and was an equity/fixed income trader at Loring, Wolcott and Coolidge, in Boston. Ryan received his B.S. in Finance and M.S. in Global Financial Analysis (with Distinction) from Bentley University. He is a CFA Charterholder and is a member of the Boston Securities Analyst Society and CFA Institute.
Ryan Driscoll
Director, CFA
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Ivo Nenin is a member of the Commonfund Asset Management Investment team and is primarily responsible for investment monitoring, rebalancing and reporting for investment portfolios with a focus on our global multi-asset program. Ivo previously assisted in managing Commonfund’s commodities program and as a fund analyst focused on valuation and reporting for the commodities and equity funds. Prior to Commonfund, Ivo worked at AIG in their Domestic Brokerage Treasury Department. Ivo earned an M.B.A. from New York University’s Stern School of Business in Finance and Management and his B.S. in Finance and Accounting from the University of Bridgeport. He holds CFA and FRM designations as well as FINRA 3, 7 and 63 licenses.
Ivo C. Nenin
Director, CFA, FRM
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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.