Market: Mysterious One-Day Roundup Rate Drops

Paritosh Bansal reported

(Reuters) - Something strange just happened in the U.S. short-term financing market: on March 19, benchmark interest rates suddenly plummeted, then bounced back up the next day.

The decline in the corner of the MMA, a market where corporations borrow money from investors against treasury bonds, has not attracted much attention outside of Wall Street trading desks.

The key repo rate, known as the Treasury GCF Repo Index, fell to 5.142% the previous day, down from 5.334% the previous day. Volume rose to $57.64 billion from $31 billion a day earlier.

According to three market sources and a check of public trading data, the drop in volume was backed by a large trade later in the day involving a large company. According to two of the sources, the deal was in the neighborhood of $20 billion at 5% and took place sometime after 1 p.m. The deal, which was reported to be in the range of $20 billion, was in the range of $20 billion at 5%, according to the sources.

This is a strange transaction because most of the activity in the repo market occurs in the morning. Sources say that a large investor may have been stuck with a large amount of cash and needed to get it off his books. They believe this is the result of poor collateral management.

Reuters could not ascertain further details of the incident, including the identities of the parties to the deal.

In the interest of transparency in one of the world's most important markets, this unusual trade is a mystery worth solving. While the incident may have been contained and the market is functioning as planned, information about what happened can provide important insights into the functioning of the market.

Short-term financing markets are critical to government debt and global finance, and disruptions in the markets can have wide-ranging effects, including on financial stability. However, short-term financing markets are often secretive, and it is sometimes difficult for even the OCC to understand what is going on in them.

Darrell Duffie, a professor of finance at Stanford University, said the GSEs may be curious about what's going on." He said, "A deal this big and with these conditions should raise some concerns.

However, Duffy noted that there was no clear indication that this represented "excessive risk to the financial system or bad behavior."

The Depository Trust & Clearing Corporation and the New York Federal Reserve, which publish the general collateral exchange rate, declined to comment. The SEC declined to comment.

The sources said the deal comes just before and after the New York Fed's anti-vibe operation, which allows money market funds, government-sponsored corporations and banks to put cash in the Fed's coffers. The Fed has been paying a rate of 5.3% for overnight funds, much higher than the rate investors received in the March 19 deal.

If the transaction involves a government-sponsored enterprise or a money market fund, information on the risk controls of the institution may be provided.

Knowledge of the deal also reveals market structure and concentration risk. The fact that the deal did not take place at a much lower rate suggests that the investors behind the deal were important enough for the bank to help them, two of the sources said.

To be sure, the deal may not have wider implications. According to one market participant, such events occur from time to time. For example, on July 8, 2022, the Treasury GCF Revolving Index experienced a similar one-day drop, from 1.55% the day before to 1.176%, before rebounding.

The March 19th transaction had limited market-wide impact. Other benchmark rates based on market transactions, such as the Secured Overnight Facility Rate (SORF) and the Broad General Resistance Rate (BGRR), were not affected by this transaction.

Even so, the model is sufficiently strong to be shown in the transaction data. For example, in calculating the broad general collateral rate, the New York Fed publishes transaction rates on a percentile basis.

On March 19, the first percentile showed a rate of 5%, lower than the previous day's rate of 5.25%. By March 20, the rate had rebounded again.

(Reporting by Paritosh Bansal; Editing by Anna Driver)