Trading in the fed funds market is significantly different than it was when the Fed last raised interest rates in 2006. Balance sheet pressures, risk aversion, and shifts in dealer behavior are pushing (some) repo rates higher relative to the fed funds rate.
- Before the financial crisis, the effective fed funds rate traded roughly 4bp above the Treasury repo (GCF) rate. Recently, the spread has narrowed and even gone below 0.
- Bank borrowing in the fed funds market has fallen 36% since early 2012, as banks are all massively long cash from QE.
- But changes in dealer behavior in the GCF market appear to have introduced a “balance sheet wedge” (upward) bias into the Treasury GCF repo rate.
“We expect an emerging GCF repo “balance sheet wedge” bias to overcome the traditional risk differential between overnight secured and unsecured rates. Thus, the GCF rate may continue to trade over the effective fed funds rate, even after “lift-off.” “, Says Barclays
The material has been provided by InstaForex Company – www.instaforex.com