As an apparent consequence of post-Brexit uncertainty, the effective federal funds (EFF) rate moved up from 38 bps in “yield” to 40 bps, and then even 41 bps on June 27. That rather tame reaction is due to the fact that there is nobody aside from primarily GSE leftovers trading in federal funds. That the market rate moved even 3 bps may be significant in terms of projecting systemic liquidity given its long ago descent into irrelevance.
The repo market, by contrast, was much more moved by conditions surrounding the UK vote. I still don’t believe that Brexit itself matters all that much, and from the perspective of global liquidity it seems more like an excuse or trigger than an actual factor. Whatever the case, repo rates shot up in sharp contrast to federal funds. The UST GC rate hit 86 bps the day of the vote, a rather shocking positive 46 bps spread to EFF. As I pointed out before, this is already an abomination given the hierarchy of risk that is supposed to dominate money markets where there is something like normal money trading.
In the weeks since then, repo rates have settled but only partially. The UST rate in GC today was fixed at 53 bps, still above the federal funds “ceiling” and still a positive 13 bps spread to EFF. These are indications that global liquidity and dollar money markets are not alright, even more so than they had become up and through the past liquidations.
The behavior of repo rates especially since early 2015 traces out the familiar CNY outline. Undoubtedly dollar liquidity pertaining to the Asian “dollar” and its Chinese access plays a primary role in setting global dollar (il)liquidity as represented in the published DTCC GC repo rate (we can only assume it is a representative indication for the fuller repo markets that remain continuously over the horizon). It is not, however, the only repo indication of illiquidity. Other dimensions of the repo markets, primarily collateral, also exhibit the same tendencies staked out to the same moments in time.
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