NEW YORK: A dearth of general collateral in the repo market is forcing repo rates lower and conditions are unlikely to ease, as they often do, at the end of the month, analysts say.
Roseanne Briggen, analyst at IFR Markets, a unit of Thomson Reuters, said general collateral rates had opened on Thursday in a range of 2 basis points to 1 basis point.
"There is still a plethora of sidelined cash, smaller Treasury bill issuance and dealers, seeing money market funds moving into riskier short-term assets, were caught a bit off sides this morning," she wrote in a note to clients.
"The eight-year, 10-year and bond are all trading on top of GC, but twos to fives are still trading 'special.'"
The Treasury Department has sold $35 billion each of two-year and five-year notes this week, but the increase of supply won't be felt in the market until the issue date of each of the sales, which is Monday. Until then, the rate on two-year and five-year Treasury notes as repo general collateral will remain negative.
Even then, the market could remain under pressure, as the Treasury Department holds back slightly on short-term debt issuance to draw out more time before borrowing reaches its legal ceiling.
"I think that's a pretty reasonable concern," said Tom Simons, money market economist at Jefferies & Co in New York.
Simons said a rule change by the Federal Deposit Insurance Corp that made it less advantageous for US banks to keep cash deposits on reserve at the Federal Reserve added to the flood of cash and demand for securities in the repo market.
"We've seen repo rates really low for the last few weeks here. Expect what's already going on in the market to get worse for a time."
Analysts have said the supply shortage in general collateral could continue into July or August, even if Congress raises the debt ceiling next month.
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