April 1, 2019 / 8:09 PM / 6 months ago

MONEY MARKETS-Key U.S. short-term interest rate rises at quarter-end

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NEW YORK, April 1 (Reuters) - An interest rate that the Federal Reserve targets rose on the last trading day of the first quarter, propelling its premium over what the U.S. central bank pays on excess reserves to its highest level ever, New York Federal Reserve data showed on Monday.

Analysts blamed the rate rise on less willingness among banks to lend their reserves at the end of the quarter in a bid to meet or to exceed regulatory standards.

Meanwhile, overnight borrowing costs in the repurchase agreement market, where Wall Street relies on cash to fund their trades, jumped to their highest levels in about three months on Friday.

“You have to take the rate increase with a grain of salt because you had quarter-end,” said Thomas Simons, senior money market economist at Jefferies LLC in New York.

The average or “effective” federal funds rate, or what banks charge each other to borrow excess reserves overnight, rose to 2.43 percent on Friday, up from 2.41 percent the day before.

The gap between effective fed funds rate and what the Fed pays on excess reserves (IOER) grew to 3 basis points above the interest rate the Fed pays on the excess reserves that banks leave with it, which is currently at 2.40 percent.

On Monday, the overnight fed funds rate was quoted at 2.400 percent to 2.4300 percent, compared with 2.4100 percent late on Friday, according to NEX Group data.

Simons said he expects it will take a few days for the fed funds rate to retreat from its quarter-end spike as banks increase its wholesale lending in the new quarter.

Reporting by Richard Leong; Editing by Steve Orlofsky and Susan Thomas

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