U.S. Banks Borrow Record $18.5 Billion from Fed’s Repo Facility

U.S. banks borrowed a record $18.5 billion from the Federal Reserve’s Standing Repo Facility (SRF) on Monday, coinciding with the quarterly deadline for corporate tax payments and Treasury debt settlements. This surge in borrowing indicates some difficulty in meeting funding obligations, according to data from the Federal Reserve. The SRF, established in July 2021 as a response to the financial challenges posed by the Covid-19 pandemic, provides daily overnight cash in exchange for eligible collateral, primarily U.S. Treasuries.

The timing of this borrowing aligns with a substantial Corporate tax payment deadline and a large settlement for recently issued Treasury securities. Analysts from money market research firm Wrightson ICAP estimated that approximately $78 billion in payments to the Treasury were due on the same day. This influx of payments is projected to increase the U.S. Treasury’s cash balance to over $870 billion.

On Monday afternoon, financial institutions borrowed $16.95 billion from the SRF, backed by Treasuries, after initially taking out $1.5 billion in cash that morning. For context, on June 30, banks borrowed about $11.1 billion from the SRF, also primarily backed by Treasuries. Jan Nevruzi, senior rates strategist at TD Securities in New York, remarked on the significance of the SRF, stating, “This is something we didn’t have last year.” He added that while the tax deadline did not seem particularly concerning, the quarter-end could bring increased funding tightness and a rise in the Overnight Reverse Repo (ON RRP) usage.

As these payments approached, rates in the repurchase market, particularly the Secured Overnight Financing Rate (SOFR), climbed above the interest paid on bank reserves. Last Friday, SOFR reached 4.42%, matching its highest level in two months, while the Interest on Reserve Balances (IORB) was at 4.40%. Typically, SOFR is expected to trade at or below IORB, as banks can always invest their funds risk-free at the Fed. A rise in SOFR above IORB indicates heightened demand for secured funding against Treasuries, especially during Treasury auction settlements.

Teresa Ho, managing director and head of short duration strategy at JPMorgan, highlighted the unexpected rise in SOFR levels in a recent research note. She indicated that while the market has managed to absorb the additional Treasury bill supply, the shift from repo to Treasury bills has accelerated, particularly as money market funds have extended their average maturities in anticipation of potential Federal Reserve rate cuts.

Despite the liquidity pressures observed on Monday, analysts believe these conditions are unlikely to persist. Lou Crandall, chief economist at Wrightson, wrote, “Funding conditions will only show the kind of incremental pressure that would typically be associated with a major Treasury coupon settlement date and a quarterly tax deadline rather than a disruptive funding squeeze.”

As U.S. banks navigate these financial landscapes, the ongoing evolution of the SRF continues to play a crucial role in stabilizing the funding environment during significant fiscal periods.