The US dollar funding markets are demonstrating remarkable resilience as the year approaches its end, with demand outstripping supply, as reported by JPMorgan Chase & Co. (NYSE: JPM). A consistent stream of overnight general collateral repurchase agreements on the final trading day of the year reflects a stable financial landscape.
In an environment where cross-currency basis swaps, involving the exchange of euros and yen for dollars, are typically prone to disruption as banks curtail overnight financing for various transactions like bond purchases to fortify their balance sheets for regulatory compliance, the current stability is noteworthy.
This year, however, substantial bank reserves have accumulated, driven by the implementation of higher rates to manage deposit outflows. The Federal Reserve’s contraction of its reverse repo facility has also played a role in injecting additional liquidity into the banking system.
The short-term funding markets are flourishing thanks to the allure of high yields on assets like Treasury bills, repos, and commercial paper, all of which have exceeded the 5% mark. The balances at the Federal Reserve’s reverse repurchase agreement facility have experienced a swift decline, with more than $1 trillion withdrawn since June. This strategic move has further buttressed the banking system and ensured elevated bank reserves, all occurring in tandem with the Federal Reserve’s ongoing quantitative tightening efforts.
