Some investors are concerned that recent turmoil in a key short-term cash market where banks borrow to fund operations could exacerbate difficulties trading bonds.
Spikes in the cost of overnight loans using repurchase agreements, or repos, could hit bond trading in two ways, investors and analysts said. Rising repo rates make it more expensive for securities dealers to borrow money and to hold government bonds—actions they take frequently to facilitate client trades and manage their risks.
In the repo market—where banks and money-market mutual funds typically lend cash for periods as short as one night in exchange for safe collateral such as Treasurys—rates surged as high as 10% last month from about 2.25% amid an unexpected shortage of available cash in the financial system.
Bond investors tend to worry about liquidity, or the ability to buy or sell a particular security, because the market doesn’t have a central exchange and a lack of trading partners could create wide gaps in prices at times of market stress. Differences in the various features of corporate bonds, which are often issued in relatively small sizes, can also make trading difficult.
“If repo rates keep getting higher, the economics of making markets is going to be that much worse,” said Peter Yi, director of money markets at Northern Trust. Elevated repo rates could make bond dealers “more selective” about the securities they are willing to buy from customers and hold on their books, making trading more difficult at times of market stress, he said.
Rates surged in the middle of last month after falling reserves in the financial system, together with a handful of large cash drains including a large corporate tax payment and a government-bond auction, prompted many banks to hold on to cash rather than lending it in the repo market.
- Former Nasdaq CEO Bob Greifeld warns that this year’s IPO boom feels similar to the late 1990s tech bubble.
- “In a sense, it reminded me back of the dot-com era, when you had companies going public that had no known path to profitability,” he says.
- “We shouldn’t be sounding great alarm bells” about IPOs, Greifeld says, but he adds that “post-WeWork, if you don’t have a path to profitability, you’re going to need that.”
Shares of General Electric Co. GE, -0.06% surged 2.6% in premarket trading Monday, after the industrial conglomerate said it was freezing the U.S. pension plan for about 20,000 employees with salaried benefits, and supplementary pension benefits for 700 employees. GE said there would be no change for retirees already collecting pension benefits; the pension plan has been closed to new entrants since 2012. The company said it will offer a limited-time lump-sum payment option to about 100,000 former employees who have not yet started their monthly pension plan payments. GE said it is pre-funding approximately $4 billion to $5 billion of minimum ERISA [Employee Retirement Income Security Act] funding requirements for 2021 and 2022. GE said the pension moves was part of its plan that is expected to reduce its pension deficit by $5 billion to $8 billion and net debt by $4 billion to $6 billion. GE’s stock has tumbled 32.4% over the past 12 months, while the Dow Jones Industrial Average DJIA, -0.09% has gained 0.5%.