(Bloomberg) -- Key benchmarks tied to US overnight funding fell, reflecting the Federal Reserve’s adjustment this week to the tools it uses to help control borrowing costs and keep these funding markets running smoothly.
The Secured Overnight Financing Rate dropped to 4.30% as of Dec. 19 from 4.57%, according to Federal Reserve Bank of New York data published Friday. That leaves it just above the new offering rate on the central bank’s overnight reverse repurchase agreement facility of 4.25%.
Other reference rates tied to the repo market — the Tri-Party General Collateral Rate and Broad General Collateral Rate — fell to 4.26% and 4.27%, respectively, from 4.56%, data show.
The effective fed funds rate, which is the Fed’s policy target benchmark, dropped by 25 basis points to 4.33%, an indication that it was unaffected by the RRP adjustment.
Officials on Wednesday lowered the rate on the overnight reverse repurchase agreement facility relative to the lower bound of the target range by 5 basis points. Market watchers had said the move is likely to exert downward pressure on money market rates and further impact the amount of funds held at the Fed facility, though it’s unclear just how large the decline would be.
“A full pass-through to the Tri-Party General Collateral rate kind of makes sense since the RRP is the key anchor for that market,” said Rishi Mishra, an analyst at Futures First Canada Inc. “The rest is mostly about balance sheet and intermediation costs, so there was no reason to expect dealers to pass through all that spread to the borrowers now.”
Before policymakers adjusted the rate, Wall Street strategists surmised SOFR and other benchmark rates would drop by an additional 3 to 5 basis points. Some had thought the fed funds rate would be unaffected by the tweak, while others anticipated a small drop.
(Updates chart, adds fed funds rate fixing, analyst comment.)
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