U.S. repo rate stays elevated as new quarter begins

[October 04, 2016]  By Richard Leong

NEW YORK (Reuters) - The cost of a key short-term funding source for Wall Street tumbled on Monday from its highest since the global credit crisis almost eight years ago, but it remained elevated on signs lending had not fully resumed by the start of the fourth quarter.

The interest rate on repurchase agreements, in which financial institutions use U.S. Treasuries and other securities as collateral to raise cash from investors, was last quoted at 0.75-0.80 percent after falling as low as 0.30-0.40 percent earlier Monday, according to ICAP data. <USONRP=GCMN>

The overnight repo rate rose as high as 1.75 percent on Friday, which was last seen nearly eight years ago during the height of the financial crisis.

"As typical with quarter-end, there is usually some hangover pressure for a day or two, and then rates are back to normal by the third day," Scott Skyrm, managing director at Wedbush Securities, wrote in a research note.

Investors increase their lending at the start of a quarter after scaling it back at the end of the prior quarter to conserve cash to meet capital requirements.

The repo rate and other short-term bank borrowing costs for Wall Street often swing sharply at the end of a quarter and start of a new one.

In the meantime, jitters about the banking sector began to abate after AFP reported on Friday that Deutsche Bank <DBNKGn.DE>, Germany' largest lender, was close to a $5.4 billion settlement with the U.S. Justice Department for the mis-selling of mortgage-backed securities before the financial crisis. That would more than halve the $14 billion initially demanded by the Justice Department.

The steep initial settlement amount rattled financial markets as traders speculated on Deutsche Bank's stability.

Interest rates for banks to borrow dollars have also been rising in recent weeks as U.S. prime money market funds have pared their purchases of short-term bank debt.

A customer counts his U.S. dollar money in a bank in Cairo, Egypt March 10, 2016. E REUTERS/Amr Abdallah Dalsh/File Photo

A number of prime money funds have been converting to funds that own only U.S. government securities, to be exempted from new industry regulations that go into effect on Oct. 14.

Monday's gradual backup in repo rates suggested some unwillingness among money funds to lend to banks. Money funds instead favored parking more of their overnight cash at the Federal Reserve through its reverse repurchase agreement program, under which they earn an interest rate of 0.25 percent.

The Fed awarded $320.89 billion in reverse repos on Monday, down from $412.52 billion on Friday and the most since December.

"If funding pressure doesn't disappear by Wednesday, then there was some fundamental change in the market," Skyrm wrote.

(Editing by Chizu Nomiyama and Steve Orlofsky)

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