A recent surge in borrowing in the federal funds market appears to be driven by a small group of banks in need of liquidity to meet regulatory requirements, according to Bank of America.
(Bloomberg) — A recent surge in borrowing in the federal funds market appears to be driven by a small group of banks in need of liquidity to meet regulatory requirements, according to Bank of America.
Increased activity in fed funds — which last week jumped to the highest in at least seven years — occurred with stable rate levels in most of the distribution, except in the 99th percentile of transactions, strategists Mark Cabana and Katie Craig said Tuesday in a note.
“Desperate FF bidders appear to be paying up,” they said.
The distribution of daily fed funds transactions published by the Federal Reserve Bank of New York shows that interest rates on overnight loans for the 99th percentile of borrowers has climbed to 4.65%, up from 4.60% two weeks ago. The benchmark rate was unchanged at 4.33% as of Jan. 31, according to data published Wednesday. The 99th percentile was also unchanged at 4.65%.
The strategists highlighted the data point as a sign that liquidity pressures in dollar funding markets have yet to become widespread as the US central bank continues shrinking its balance sheet, removing cash from the banking system.
The Fed’s interest-rate increases and balance-sheet reduction have led depositors to shift money out of banks and into higher-yielding alternatives like money-market funds — prompting banks to turn to alternative sources of funding, like the fed funds market. But the central bank is unlikely to see the recent surge in volumes there as a sign that it needs to alter its course, according to the BofA strategists.
“The Fed is likely to conclude that funding pressures are still mild and reasonably well contained given limited spillovers,” Cabana and Craig said. “The Fed is also likely to conclude that reserve scarcity is some time away given the isolated nature of recent FF activity.”
(Adds fed funds rate in the fourth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.