RPT-US repo market ends quarter calmly with small impact from Middle East conflict

By Gertrude Chavez-Dreyfuss

NEW YORK, March 31 (Reuters) - U.S. overnight funding markets showed little sign of quarter-end stress on Tuesday, with repo rates steady and comfortably within the Federal Reserve's target range despite a Middle East conflict that has strained trading in the Treasury market.

Repo, or repurchase, rates often jump at quarter- and year-ends as banks pull back from lending in these markets to manage their balance sheets for regulatory reporting. That pullback can make short-term cash more expensive.

The general collateral, or GC, repo rate — which reflects the cost of borrowing cash overnight using Treasuries or other high-quality securities as collateral — opened on Tuesday at 3.78%, fell as low as 3.61% and finished the session at 3.65%, according to data from broker-dealer Curvature Securities.

Those levels were well within the Federal Reserve's target range for the federal funds rate of 3.50% to 3.75%.

FED PURCHASES STABILIZE MARKETS

"Once the Fed started expanding its balance sheet again, particularly through monthly Treasury bill purchases, that really brought stability back to the repo market," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"Typically around quarter-end you would expect unusual spikes or upward pressure on rates. The added buying from the Fed has largely eased those quarter-end and calendar-end concerns," Barnes said.

In December, the Fed began buying short-dated Treasury bills in what it calls "reserve management purchases," aimed at bolstering liquidity and ensuring it maintains control over overnight interest rates. Under the program, the Fed has been purchasing about $40 billion in Treasury bills per month.

Those purchases have significantly reduced the net supply of Treasury bills available to private investors, pushing prices up and yields down. Analysts said the reduced supply has helped relieve pressure in funding markets and kept overnight repo rates stable.

FED POLICY SHIFT EASES PRESSURE

The Fed also began slowing — and then effectively halting — the runoff of its balance sheet in December, reversing part of its long-running quantitative tightening program. Policymakers cited signs of tightening liquidity last year, when repo rates periodically moved higher, as a reason for the shift.

Sporadic spikes have emerged in funding markets around quarter- and year-ends over the past several years. Repo rates were higher than average through much of 2023 and became especially volatile in the final days of 2024.

A more dramatic episode occurred in September 2019, when repo rates surged after a sharp drop in bank reserves coincided with a corporate tax payment deadline and heavy Treasury settlement activity.

Joseph Abate, head of rates strategy at SMBC Nikko Securities in New York, said the pullback in Treasury bill supply from peak levels has also helped ease upward pressure on repo rates.

Last year, the Treasury sharply increased bill issuance to rebuild its cash balance after it was depleted during a debt-ceiling standoff that limited its ability to issue new debt. Once Congress raised the debt ceiling, the Treasury needed to rapidly replenish its cash account, contributing to tighter conditions at the time.

When new Treasury securities are issued, investors such as dealers, banks and money-market funds must deliver cash to the U.S. Treasury on settlement day. That cash is transferred to the Treasury General Account at the Fed, temporarily reducing the amount of reserves available in the banking system.

As reserves decline, borrowing cash in the repo market can become more expensive, pushing repo rates higher.