In a notable turn of events, the cost of borrowing funds backed by U.S. Treasuries experienced a spike this week, reaching its highest level since 2019. The DTCC GCF Treasury Repo Index, which tracks the average daily interest rate for the most-traded General Collateral Finance (GFC) Repo contracts for U.S. Treasuries, surged to 5.452% on Tuesday from 5.395% the previous week. Market participants attribute this increase to dealers closing their balance sheets for the year.

Year-End Dynamics and Financing Costs

The spike in the DTCC GCF Treasury Repo Index is primarily attributed to dealers closing their books for the year. This annual practice resulted in borrowers having to pay higher costs to fund their collateral
contributing to the rise in short-term financing rates. The need for cash, driven by year-end dynamics, led to increased volatility in overnight fund rates.

Tom di Galoma, Managing Director and Co-Head of Global Rates Trading at BTIG
noted, “There is a lot of volatility in overnight rates due to year-end,”
emphasizing the impact of year-end financial activities on short-term financing dynamics.

Short-Term Conserns and Interpretations

While the spike in the GFC repo price might raise concerns about cash scarcity in a key funding market for Wall Street, some analysts view this as a normal occurrence at year-end. Steven Zeng, U.S. Rates Strategist at Deutsche Bank, highlighted that the GCF market involves dealer-to-dealer lending
with a limited amount of cash being moved around, resulting in higher rates. The market’s nature during year-end closures tends to create short-term fluctuations.

Usage of the Fed’s Reverse Repo Facility

The increase in the GFC repo price coincides with an uptick in the usage of the Federal Reserve’s reverse repo (RRP) facility. As large dealer banks offer less intermediation at year-end, cash in money market funds faces challenges in making its way to hedge funds and other cash borrowers. The rise in the Fed’s RRP facility usage suggests money market funds seeking avenues to invest cash but lacking sufficient private counterparties.

Cash flowing into the Fed’s RRP facility rose to $793.9 billion on December 26 from $772.3 billion at the end of the previous week
reflecting a notable shift in investment patterns as year-end dynamics impact traditional market flows.

Year-End Short-Term Dynamics and Market Impact

Scott Skyrm, Executive Vice President of Curvature Securities, emphasized the influence of year-end dynamics and the impact on money market funds. He noted
“It’s year-end coming, and bank balance sheets and window-dressing are preventing the money market funds from taking cash to banks,” highlighting the unique challenges and patterns seen in the financial markets as the year concludes.

In essence, the short-term financing rate spike and increased usage of the Fed’s reverse repo facility underscore the nuanced dynamics and challenges faced by financial markets during the year-end book closure period.