By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 15 (Reuters) – U.S. banks borrowed $1.5 billion from the Federal Reserve’s Standing Repo Facility on Monday, the deadline for quarterly corporate tax payments, Fed data showed, suggesting some tightness in meeting funding obligations. The SRF serves as a backstop for any potential funding shortage. Launched in July 2021 in the aftermath of the Covid-19 pandemic, the Fed’s SRF offers daily overnight cash twice a day in exchange for eligible collateral like Treasuries.
The corporate tax date coincides with a large Treasury security settlement for recently-issued debt. Data from money market research firm Wrightson ICAP showed there was roughly $78 billion in payments to the Treasury due on Monday as well.
Those settlements along with corporate taxes should push the U.S. Treasury’s cash balance to more than $870 billion.
Ahead of these payments, rates in the repurchase (repo) such as the Secured Overnight Financing Rate have risen above the interest paid on bank reserves. SOFR, the cost of borrowing cash overnight collateralized by Treasuries, rose to 4.42% last Friday, the highest in two months, while the Interest on Reserve Balances is currently 4.40%.
SOFR should trade at or below IORB because banks can always park money risk-free at the Fed and earn IORB. But if SOFR rises above IORB, it suggests there is exceptional demand for secured funding against Treasuries, which typically happens around Treasury auction settlements.
Analysts, however, said Monday’s liquidity pressure should be temporary.
“Funding conditions will only show the kind of incremental pressure that would typically be associated with a major Treasury coupon settlement date and a quarterly tax deadline rather than a disruptive funding squeeze,” wrote Lou Crandall, chief economist at Wrightson.
The Fed will offer cash again in the afternoon.
On June 30, financial institutions borrowed about $11.1 billion from the SRF, backed mostly by Treasuries as collateral, the largest such borrowing since its launch four years ago. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Nia Williams)
