U.S. Markets

U.S. repo rates surge on tax payments, bond settlements

NEW YORK (Reuters) - What banks and Wall Street dealers pay for overnight cash in the repurchase agreement market surged on Monday to the most expensive levels since early 2019 as the cash for lending fell due to payments on corporate taxes and the supply of Treasuries.

The overnight rate in the repurchase agreement (repo) market USONRP=GCMN jumped to 4.10% from 2.29% late on Friday. That was the highest level since 6.5% recorded on Jan. 2.

“The amount was way higher than anyone had expected,” said Tom Simons, senior money market strategist at Jefferies LLC.

Last week, the Treasury Department sold $78 billion in three-year, 10-year and 30-year debt securities, which are scheduled to settle on Monday.

Quarterly federal tax payments for U.S. companies are due on Monday.

On Friday, money market funds experienced $20.4 billion in outflows prior to the deadline on corporate tax payments and settlement on coupon-bearing Treasuries, according to Crane Data.

Peter Crane, president of Crane Data, said it is not usual to see this type of outflows from money funds ahead of quarterly tax payments.

Meanwhile, the surge in repo rates likely curbed bidding at the auctions of $45 billion in three-month Treasury bills US3MT=RR and $42 billion in six-month bills US6MT=RR on Monday due to higher borrowing costs for dealers, Jefferies' Simons said.

“To an extent, the bill auctions suffered because dealers weren’t bidding for them,” he said.

The bid-to-cover ratio, a measure of overall auction demand, at the three-month T-bill sale fell to its lowest in a month, resulting in an interest rate at the highest in three weeks.

The bid-to-cover ratio at the six-month auction was the lowest since Aug. 5 with its interest rate reaching the highest in six weeks.

Repo rates should retreat later this week on monthly interest payments from mortgage-backed securities to investors and a possible rate decrease from the Federal Reserve, Simons said.

(GRAPHIC: U.S. repo rate - )

Reporting by Richard Leong; Editing by Paul Simao and Chris Reese