The rising volatility and slowly declining liquidity in the market for U.S. Treasury securities is making possible a near-future dangerous crisis in interbank lending, according to a Dec. 5 Bloomberg News article, “Repo-Market Spikes Conjure Memories of September 2019 U.S. Funding Turmoil.” It reports that the Secured Overnight Funding Rate of the Federal Reserve rose sharply and stuck at 5.54% Nov. 30—still only half the spike of Sept. 15-16, 2019, but “drawing unsettling comparisons with turmoil that rocked the space more than four years ago.”
The U.S. Treasury’s huge and continuing debt issuance, largely in Treasury Notes of only 6 months’ to 2 years’ duration, has magnified the greatly expanded role of hedge funds in “buying frenzies” and has skyrocketed those funds’ demand for repurchase agreements ("repos"), essentially using Treasuries as collateral to borrow from banks to buy more Treasuries or, even more often, Treasury security futures, derivatives. This enables far greater debt leverage into the market, as far greater volumes of futures, than Treasuries themselves, can be purchased for the same borrowed funds.
