(Bloomberg) -- The U.S. money-market interest rate remained elevated for a third straight day, after rising to a record Tuesday.
The rate on overnight general collateral repurchase agreements, or repos, was at 2.8% early Wednesday, based on ICAP pricing. On Tuesday, it jumped to 10%, about four times greater than last week’s levels, as cash reserves in the banking system remained out of balance with the volume of securities on dealer balance sheets.
The effective fed funds rate was set at 2.25% as of Monday, in line with the top of the Federal Reserve’s target range of 2% to 2.25%. The New York Fed will release Tuesday’s rate at 9 a.m.
The Fed will buy up to $75 billion of securities later Wednesday morning. It would follow a $53.2 billion liquidity injection Tuesday, the first in a decade, on attempt to calm market nerves as the jump in short-term rates could boost borrowing costs for companies and consumers. Surges are commonplace only around quarter- and month-end, so market participants had expected things might return to normal.
Securities eligible for collateral in the Fed operation include Treasuries, agency debt and mortgage-backed securities. In an overnight system repo, the Fed lends cash to primary dealers against Treasury securities or other collateral.
On Monday, the rate on overnight GC repo touched 8%, according to ICAP, 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.
Later Wednesday, the central bank is expected to lower its benchmark interest rate by a quarter percentage point at its policy meeting in Washington.
Separately, the Secured Overnight Financing Rate, which is backed by overnight GC repo transactions, jumped to 5.25% as of Tuesday from 2.43% the prior session, New York Fed data show.
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, Debarati Roy
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