I just chatted with my money market mole. He is always interesting, and in the current environment, informative.Today is the last day of the quarter and he notes that some of the pressures emanate from the balance sheet constraint. However, he calls the market the most dysfunctional market that he has witnessed in 20 years.
He cites the Federal Funds rate and its 2 percent target. Over the years the Open Market Desk has done a swell job of moderating the swings in the funds rate. So, he suggests a 50 basis point range is a wide range. In the current environment funds opened this morning at 6 ½ to 7 percent before they began to glide down towards the 2 percent target level. He makes the point that the trading today is reminiscent of the wild swings at year end 25 years ago and is not the type of movement one would expect on a quarter end date.
Trading today has been limited to overnights with virtually no term trades.
I asked if he thought that the market would normalize when we flip the calendar page to October. He suspects that there will be some moderation in the pressure but does not expect a full return to status quo ante. He notes that many investors have had a road to Damascus conversion on the topic of risk and trading patterns will be altered for a very long time.
Separately, most Treasury repo is trading around 40 basis points for GC and zero for specials. Some sec lenders and state funds had pulled collateral and that collateral should return to the market in October. That will take some pressure off the collateral squeeze.