(Bloomberg) -- U.S. money-market interest rates surged for a second day Tuesday as cash reserves in the banking system remained out of balance with the volume of securities on dealer balance sheets.
Amid the squeeze, the effective fed funds rate rose to 2.25%, in line with the top of the Federal Reserve's target range of 2% to 2.25%.
The rate on overnight general collateral repurchase agreements soared by more than 600 basis points to 8.75%, based on ICAP pricing, before settling back around 7.25%. Surges are commonplace only around quarter- and month-end, so market participants had expected things might return to normal.
“This is certainly painful for firms that have to fund positions,” said Thomas Simons, an economist at Jefferies LLC. “So it's difficult for the dealer community. But it's not systemically threatening.”
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On Monday, the rate on overnight GC repo soared by as much as 248 basis points to 4.75%, the highest level since December, according to ICAP pricing, amid the settlement of Treasury coupon auctions and the influx of corporate quarterly tax payments, possibly aggravated by last week's bond-market selloff, in which investors sold securities back to dealers.
Separately, the Secured Overnight Financing Rate, which is backed by overnight GC repo transactions, rose to 2.43% Monday from 2.20%, New York Fed data show. That's the highest since July 31.
--With assistance from Liz Capo McCormick.
To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Elizabeth Stanton
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