Goldman Sachs has highlighted a recurring end-of-month pattern in the U.S. money markets, where overnight lending rates are expected to rise significantly. The rise is attributed to Wall Street banks absorbing a substantial amount of newly issued U.S. Treasury securities. This week, a record $531 billion of new debt is set to be issued, potentially drawing significant cash from banks. This could reduce the amount of cash banks can lend through overnight repurchase agreements.
Historically, the issuance of Treasury securities has led to a predictable increase in the Secured Overnight Financing Rate (SOFR), a trend noted at the end of previous quarters in June and September and continuing since last November. William Marshall, the head of interest rate strategy at Goldman Sachs, indicated that a similar situation could arise again this week. Increased balance sheet constraints may require substantial liquidity intervention to manage the situation. He warned that SOFR might see an uptick as November approaches, potentially deviating from the typical pattern seen during mid-quarter month-ends.
While the recent end-of-month SOFR increases have been temporary with minimal impact beyond a brief rise in overnight loan costs, there are concerns about the sufficiency of liquidity in the U.S. financial system. This concern grows as the Federal Reserve continues to implement quantitative tightening by withdrawing cash from the market.
In response to potential market stress, the Federal Reserve has taken measures to mitigate pressure in financing markets, such as slowing the pace of quantitative tightening. The Dallas Federal Reserve President recently noted that the monthly SOFR spikes haven't caused severe liquidity concerns. However, according to JPMorgan strategists, Teresa Ho and Pankaj Vohra, the persistence of these SOFR spikes is becoming increasingly difficult to dismiss. They observed that the frequency, magnitude, and duration of these increases are growing, challenging the perception of these spikes as merely temporary dislocations.
