US dollar funding markets are looking sanguine about year end, especially as demand continues to outstrip supply, according to JPMorgan Chase & Co.
Trading of overnight general collateral repurchase agreements for the last trading day of the year is steady, while in times of turmoil activity would surge as banks pare their balance sheets. Cross-currency basis swaps — the cost of swapping euros and yen for dollars, the world’s preferred currency in times of stress — are stable, after widening out at the end of September. At the same time the gap between financial commercial paper and overnight index swaps has only widened slightly.
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The end of the year tends to bring market dislocations as banks pull back on providing overnight financing for bond purchases and other transactions to shore up their balance sheets for regulatory purposes. But this year, banks don’t necessarily have to pull back as much on offering that funding: their reserves are relatively plentiful, after they’ve been paying higher rates to help stem deposit outflows. And the Federal Reserve has been draining its reverse repo facility, which has also resulted in money getting pushed off its balance sheet and into the banking system. That’s helped mitigate some strategists’ concerns that short-term funding markets would face pressure and spreads would widen there.
Short-term funding markets have also been helped by the relatively high rates on assets ranging from Treasury bills and repos to commercial paper, where yields are over 5%. The short duration for these instruments are a haven for investors concerned about dropping prices in other markets.
Balances at the Fed’s reverse repurchase agreement facility, where money-market funds can earn interest on overnight cash, have been dropping faster than expected, with over $1 trillion yanked out since the beginning of June. That’s actually pushed more money back into the banking system and helped bank reserves remain relatively high even as the Federal Reserve has been shrinking the money supply and quantitatively tightening over the course of more than a year.
In fact, balances at the Fed rose by nearly $65 billion to $3.35 trillion in the week through October 18, Fed data show. That’s higher than where they were in May 2022 before the Fed started cutting its bond holdings.
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JPMorgan strategists also acknowledged that most companies that fund in the commercial paper market are ahead of where they usually are in terms of securing funding through the turn of the year. The strategists estimate that about 60% of bank commercial paper and certificates of deposit outstandings aren’t maturing until 2024, a higher percentage than in the last few years. Also, issuers of asset-backed commercial paper have 37% of outstanding debt maturing over the turn of the year, higher than this time in 2022, and tier 2 issuers — companies with a lower short-term credit rating — are also well ahead in securing funding over year-end relative to the past two years.
Yet the strategists estimate banks still have about $570 billion of unsecured CP and certificates of deposit that still need to be rolled into 2024, nearly half of which are concentrated among Japanese, Canadian and French banks.
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