(Bloomberg) — A key rate underlying the US financial system jumped sharply at the end of September, an indication that volatility surrounding the end of the quarter has returned.
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The Secured Overnight Financing Rate — an important one-day lending benchmark linked to activity in the repurchase agreement market — rose to 4.96% as of Sept. 30, according to the latest Federal Reserve Bank of New York data published Tuesday.
The uptick pushed the spread between SOFR and the effective fed funds rate, which policymakers this month cut by half a point, to 13 basis points — the most since March 2020. The fed funds rate is as of Sept. 27.
Excluding days when the Fed has raised interest rates, which results in a increase of the benchmark, it’s also the largest one-day increase in SOFR fixing since March 2020. The jump is reinvigorating the debate around whether the Fed can keep removing liquidity from the system via quantitative tightening, or QT, without causing problems.
Volatility in funding markets is becoming increasingly common around month- and quarter-ends, even beyond the regular moves seen as banks pare back activity in the market for repurchase agreements to shore up their balance sheets for regulatory purposes.
Reference rates tied to overnight repurchase agreements, like SOFR, have shifted higher in these periods amid a pickup in Treasury bill issuance and dealer balance sheets stuffed with near-record amounts of government securities.
That’s been testing the traditional functioning of the funding markets, and drawing attention from market participants who remember a blowup in September 2019. This time, though, the Fed has already taken steps to reduce potential strains, such as slowing the pace of its balance-sheet runoff.
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