US $7 trln repo market frozen, rates near 0-traders
Wed Dec 10, 2008 10:53am EST
NEW YORK, Dec 10 (Reuters) - The $7 trillion U.S. repurchase or “repo” market where institutions can borrow safe-haven Treasuries is close to paralyzed as rates nudge zero percent, traders and analysts said on Wednesday.
Huge pressure from the global credit crisis on banks and fund managers to stock up on less risky assets is growing with book-balancing needs ahead of year end.
Lenders are hoarding safer government securities and activity has dried up, putting those who still need to borrow this paper in a bind, analysts said.
“Our repo traders say the market is completely locked up and is going to remain locked up through year end,” said T.J. Marta, fixed income strategist with RBC Capital Markets in New York. Some rates in the repo market are at zero, leaving participants with effectively no incentive to lend, analysts said on Wednesday.
The dislocations in the repo market stem from the huge flight to safety bid into less risky assets and worries about deflation as the U.S. recession deepens. Those fears sent investors scrambling for Treasury bills at an auction on Tuesday, handing the U.S. government an interest free loan at a $30 billion bills auction, sold at a zero percent high rate for the first time ever.
In the repo market, “the lenders are being impacted by two factors that would cause them to pull back,” said Marta. “One is the very low yield. Two is the need to shore up their own balance sheets with less risky securities.”
The repo market freeze is reducing the available supply of Treasuries, making it difficult for big investors to obtain Treasuries, which would add to the already intense bid for government securities.
“This has the potential to disrupt secondary market trading,” said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. “How are big investors going to buy Treasuries?” he asked.
“I guess they could buy at Treasury auctions,” he added.
Even though the global banking system remains severely damaged from the biggest credit crisis in a generation, the turn of the calendar year should relieve some of the pressure on fund managers to hold safer assets and may ease some of the severe strains in the repo market, analysts said.
“Our repo traders think the repo market will start to unfreeze after year end passes because that’s the passing of one hurdle,” said Marta.
“However it is not going to completely unfreeze because the deleveraging is not done,” he said, with global financial institutions expected to take more write downs and losses as the sliding economy wreaks more damage on lending activity. (Reporting by John Parry; Editing by Chris Reese)
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