NEW YORK, Sept 15 (Reuters) - U.S. banks borrowed a record $18.5 billion from the Federal Reserve's Standing Repo Facility on Monday, the deadline for quarterly corporate tax payments and Treasury debt settlements, Fed data showed, suggesting some tightness in meeting funding obligations.
The SRF serves as a backstop for any potential funding shortage. Launched in July 2021 in the aftermath of the Covid-19 pandemic, the Fed's SRF offers daily overnight cash twice a day in exchange for eligible collateral like Treasuries.
The corporate tax date coincides with a large Treasury security settlement for recently issued debt, analysts said. Data from money market research firm Wrightson ICAP showed roughly $78 billion in payments to the Treasury due on Monday as well.
Those settlements along with corporate taxes should push the U.S. Treasury's cash balance to more than $870 billion.
U.S. financial institutions borrowed $16.95 billion from the SRF Monday afternoon backed by Treasuries, after taking out $1.5 billion in cash in the morning.
On June 30, financial institutions borrowed about $11.1 billion from the SRF, backed mostly by Treasuries as collateral.
"This is something we didn't have last year," said Jan Nevruzi, senior rates strategist at TD Securities in New York.
But he noted that overall Monday's tax date does not look that bad although "quarter-end might see more tightness in funding, increase in the ON RRP (overnight reverse repo), and larger SRF takeup."
Ahead of these payments, rates in the repurchase (repo) such as the Secured Overnight Financing Rate have risen above the interest paid on bank reserves. SOFR, the cost of borrowing cash overnight collateralized by Treasuries, rose to 4.42% last Friday, matching the level hit on September 5, which was the highest in two months. The Interest on Reserve Balances, on the other hand, is currently 4.40%.
SOFR should trade at or below IORB because banks can always park money risk-free at the Fed and earn IORB. But if SOFR rises above IORB, it suggests there is exceptional demand for secured funding against Treasuries, which typically happens around Treasury auction settlements.
Teresa Ho, managing director and head of short duration strategy at JPMorgan in New York, said in a recent research note that while firmer SOFR levels are to be expected, "the magnitude somewhat caught us off guard."
She noted that while markets have largely absorbed the additional Treasury bill supply with ease, the reallocation from repo to T-bills accelerated in August as money market funds aggressively extended their weighted average maturities, pricing in potential Fed rate cuts.
Analysts said Monday's liquidity pressure should be temporary.
"Funding conditions will only show the kind of incremental pressure that would typically be associated with a major Treasury coupon settlement date and a quarterly tax deadline rather than a disruptive funding squeeze," wrote Lou Crandall, chief economist at Wrightson.
Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley, Nia Williams and Richard Chang
