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The Rising Cost of Borrowing: Unwinding Balance Sheets at Year-End

As the year draws to a close, borrowing costs for U.S. Treasuries have spiked to the highest level since 2019. The DTCC GCF Treasury Repo Index, which tracks the cost of getting General Collateral Finance (GCF) Repo contracts for Treasury bonds, rose to 5.452% from 5.395% last week – the highest rate since September 2019.

Market participants attribute this spike to dealers closing their year-end balance sheets. When it comes time for borrowers to secure their collateral until the New Year, they have to pay more to fund their loans. Tom di Galoma – managing director and co-head of Global Rates Trading at BTIG – commented that “It looks like there was a need for cash which drove up the overnight fund rates. There is a lot volatility in overnight rates due to year-end.”

Though the influx of cash into the Federal Reserve’s Reverse Repurchase Facility saw some promise, the amount of money channeled into the Repo Market was still limited due to large dealer banks offering reduced intermediation. Steven Zeng – U.S. Rates Strategist at Deutsche Bank – offered an explanation for this observation: “The GCF market is dealer to dealer lending, so a much more limited amount of cash (is) being moved around, resulting in higher rates.”

Scott Skyrm – Executive VP of Curvature Securities – believes that this year-end situation has resulted in money market funds not being able to take cash to banks, as investors had planned. He concluded that “if it wasn’t year-end, a lot more of that RRP cash would be flowing into the repo market.”

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3. Skyrocketing Rates – Is it Year-End Again?