Issuers have been selling debt linked to the new benchmark developed by the New York Fed as a potential replacement in dollar markets for the London interbank offered rate. Yet while money-market funds have been scooping the debt up, there appears to be some hesitation about fully committing to the rate, which is derived from pricing in the repurchase-agreement market. The lack of a credit component -- which Libor has -- is one potential question mark hanging over it, and SOFR has also experienced various growing pains since its introduction.
Todd Bean, a fund manager at State Street Global Advisors, said at the conference that he expects portfolio managers to remain cautious about getting involved with any longer-dated floating-rate notes linked to the benchmark. Federated’s Cunningham, meanwhile, said that the end of Libor is “not a done deal,” and in a pun-laden panel discussion on the topic opined “it ain’t over ’til it’s SOFR.”
Sponsored Repo
Government money-market funds have grown since 2016’s industry reforms, spurring an increase in appetite for repurchase agreements that in turn is fueling demand for so-called sponsored repo. These are transactions in which dealers on the Fixed Income Clearing Corporation’s cleared repo platform sponsor non-dealer counterparties, and the amount of money-fund cash invested in this area last month climbed to a record $154 billion.
Travis Keltner, managing director of funding and collateral at State Street, said sponsored repo will be an issue regardless of what the Fed does with monetary policy. He also underscored the idea that an increased supply of Treasuries is creating more volatility in repo generally, helping to drive activity in the market. Michael Bird at Wells Fargo Asset Management said this week that FICC-sponsored repo now accounts for more of his firm’s repo volume than any other single counterparty. FICC is about “as sexy as you can get” for new government-sponsored repo products, he said.
The U.S. Debt Ceiling
The next stage in the seemingly constant battle over America’s debt limit is looming on the horizon, with the Treasury Department potentially exhausting its current borrowing authority around October. But with questions around the Fed taking center stage, concerns over the ceiling are taking a back seat for many investors.
Jeff Weaver, head of money funds and short duration at Wells Fargo Asset Management, said that he’ll start to get concerned about the debt limit around late-August or early-September, but nevertheless expects the government will “come up with what is correct and right” at the last minute. Yet even if there is an agreement in Washington, the very resolution of the ceiling dilemma may create waves in short-end markets and add to funding-market turbulence in the fourth quarter.
This article was provided by Bloomberg News.