© Reuters. FILE PHOTO: A street sign for Wall Street hangs in front of the New York Stock Exchange May 8, 2013. REUTERS/Lucas Jackson/File Photo
By Paritosh Bansal
(Reuters) – U.S. short-term financing markets recently saw a spike in interest rates at month-end, leaving Wall Street wondering whether the financial system is running out of cash. A spike in repurchase agreements, or repo, can be a sign that cash is getting scarce. Markets need a decent amount of liquidity to function smoothly.
Although the elevated level of the interest rate between Nov. 30 and Dec. 4 was explained by factors other than cash scarcity, such as month’s end book-closing by banks and hedge fund trading, it still set Wall Street abuzz. The U.S. Federal Reserve is draining hundreds of billions from the financial system by selling bonds in a process called quantitative tightening (QT) to normalize monetary policy after the pandemic-era stimulus, causing concern that cash levels could be approaching a tipping point.
One problem for the market is that there is no consensus on how much cash in the system is too little, and so there is no telling when that level might be breached. Estimates vary widely, adding to the jitters.
Tell Alessio, treasurer at regional lender Cadence Bank, said while they have access to ample liquidity they are watching for the threshold below which market functioning could be disrupted. “We actively monitor the repo markets for leading indicators of what that lower boundary is,” Alessio said in an email.
in September but has not released results, leaving only data from May in the public domain.
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