US banks borrow $1.5 billion from Fed amid tax and treasury deadlines

On Monday, U.S. banks borrowed $1.5 billion from the Federal Reserve's Standing Repo Facility (SRF). This borrowing coincided with quarterly corporate tax payments and Treasury debt settlements. The SRF acts as a backstop for potential funding shortages, providing overnight cash in exchange for Treasuries and other eligible collateral. (Source: Reuters)

The SRF was launched in July 2021 in the aftermath of the Covid-19 pandemic. It provides twice-daily overnight cash to financial institutions in exchange for eligible collateral. On June 30, banks borrowed $11.1 billion, the largest borrowing since the SRF’s launch, backed mostly by Treasuries.

Monday saw roughly $78 billion in Treasury payments due, along with corporate taxes. U.S. financial institutions borrowed $1.5 billion in the morning, while there were no borrowings in the afternoon. After these payments, the Treasury’s cash balance is expected to rise above $870 billion. Analysts noted that small utilization of the SRF was in line with expectations and likely temporary.

The Secured Overnight Financing Rate (SOFR) measures the cost of borrowing cash overnight using Treasuries as collateral. Last Friday, SOFR rose to 4.42%, slightly above the Interest on Reserve Balances (IORB) of 4.40%. This indicates exceptional demand for secured funding, often around Treasury auction settlements. Money market funds have been reallocating to T-bills and holding cash ahead of tax payments, which contributed to the tightness.

Liquidity pressures on Monday are expected to be temporary and tied to Treasury settlements and corporate tax deadlines. Analysts highlighted that this represents incremental funding pressure rather than a disruptive squeeze. Elevated repo activity and short-term cash tightness reflect normal market adjustments, as noted by experts from Deutsche Bank, JPMorgan, and Wrightson ICAP.

(Disclaimer: This slideshow has been sourced from Reuters)