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Jefferies analysts said there is “some evidence of liquidity stresses in the U.S. money markets,” noting that recent borrowing patterns and rate spreads point to tightening conditions.
In a note to clients, Jefferies analyst Christopher Wood highlighted comments from Federal Reserve Chairman Jerome Powell, who “signaled on 14 October at an annual meeting of the National Association for Business Economics in Philadelphia that quantitative tightening, in terms of shrinking the Fed balance sheet, may end ‘in coming months.’”
Powell added that “some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates.”
According to Jefferies, the most obvious sign of stress “has been growing resort in recent months to borrowing from the Fed’s Standing Repo Facility (SRF), set up back in July 2021 after a squeeze in the repo market in September 2019.”
The bank said this facility should be viewed as last resort borrowing, noting that “U.S. banks borrowed a record US$11.1bn from the SRF on 30 June and a total of US$20.1bn in four days since last Wednesday.”
Jefferies added that the liquidity strains have also been reflected in rate spreads.
“This has also coincided with a pickup in the spread between the repo rate (SOFR) and the Fed funds effective rate, which last week peaked at 19bp, though it is now down to 12bp,” the note said.
That spread remains “well above the negative 7bp reached in May and an average spread of -1bp in the first half of this year,” Jefferies added.