(Bloomberg) -- Goldman Sachs Group Inc. said US money markets this week are heading toward what’s becoming an increasingly common month-end ritual: a sharp — if brief — jump in overnight lending rates as Wall Street banks absorb a huge pile of new Treasuries.
A record slate of auction settlements coming Thursday will pull large amounts of cash away from banks just as they bolster capital holdings to satisfy regulatory requirements, threatening to reduce the amount that’s free to be lent out through overnight repurchase agreements.
The monthly bond sales have been causing a fairly predictable jump in the the Secured Overnight Financing Rate, a benchmark for repo transactions. Such increases were seen at the end of September and June, continuing a run of such spikes that have coincided with month-end settlements since November.
Goldman’s head of interest rate strategy, William Marshall, said that’s likely to happen again this week, saying the settlements are requiring “significant liquidity intermediation at a time when some balance sheet constraints are likely intensifying.”
“Such shifts are likely to translate to another jump in SOFR heading into November, with risks firmly to the upside versus what has been the norm over prior mid-quarter month-ends,” he wrote in a note to clients.
This week’s expected pressure stems from what Goldman Sachs said will be the combined gross settlement of $531 billion of Treasury auctions on Thursday, the largest daily amount on record.
The recent end-of-month SOFR jumps have been short lived, with few visible repercussions aside from making overnight loans briefly more expensive.
But the fanned some speculation about whether there’s sufficient liquidity in the US financial system as the Fed continues to pull out cash through quantitative tightening. That’s the process the central bank has been using to pull back its pandemic-era support of the bond market by not buying new Treasuries when its holdings mature, which has required others to fill the breach.
The Fed has already taken steps to reduce potential strains in funding markets, such as slowing the pace of its quantitative tightening, though Dallas Fed President Lorie Logan last week said the month-end spikes aren’t raising significant liquidity concerns.
Yet JPMorgan Chase & Co. strategists Teresa Ho and Pankaj Vohra said that the SOFR spikes are becoming more difficult to dismiss as they appear increasingly ingrained.
“These elevated SOFR levels are becoming more common, and will only move higher in magnitude and longer in duration over time, which make it somewhat hard to write-off these spikes as simply temporary dislocations,” they wrote.
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