A new theory on what shocked the overnight lending market
When turmoil erupted in the US overnight lending market in September, it came as a big surprise.
The spike in overnight borrowing rates forced the Federal Reserve to come to the rescue, pumping in lots of cash and restarting bond purchases. This eased any panic, and appears to have helped juice the stock market as an unintended side effect.
But a big question has loomed: What caused the shock, unprecedented since the global financial crisis?
In a new report, the Bank for International Settlements points to larger problems at play. This corner of the market relies heavily on the largest four US banks — and those banks have been holding more liquid assets in US Treasuries compared to what they store with the Federal Reserve, BIS notes. This could have contributed to the cash crunch.
Another factor: hedge funds, which have been financing more trades through this part of the market, per BIS.
The debate over what caused the problems in so-called “repo” markets is likely to continue. In the meantime, stocks could keep benefiting from the Fed’s intervention.
Morgan Stanley estimates that global stocks have seen nearly $175 billion in inflows since September, with two-thirds of that heading to the United States. “So long as central banks keep pumping this liquidity in, and trade negotiations don’t break down, we see little reason to think this can’t continue,” the bank’s equity strategists told clients Monday.
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.
