April 2014 Collateral Shortage Preview
Almost every year Repo rates decline from the middle of April to around the middle of May – it’s known as the “April Collateral Shortage.” It occurs because a large amount of Treasury bills mature right after the April 15 tax date, which creates a shortage of collateral in the market. Traders first noticed the collateral shortage back in April 1997 – the first year the U.S. government ran a budget surplus and tax receipts were abnormally high.
For a more detailed account, see my article from last year: “April Collateral Shortage Preview”
Background
In anticipation of tax revenue arriving on April 15, the Treasury increases the size of its Treasury bill auctions, both CMBs and regular bills, beginning in February to make it through the April 15. Once the tax receipts start coming in, the CM bills mature and much of that cash goes into the Repo market. There are several other factors which determine the size and depth of the shortage:
Recently
- Quantitative Easing Programs – The size of the Fed’s QE purchases.
- General Demand For Treasurys – If the market is experiencing a “flight-to-quality,” meaning there’s already a shortage of treasury collateral before the seasonal April factors begin.
- General Money Flows – Depending on sentiments in the market, investors will allocate more or less of their investments to cash.
- Treasury Issuance – Depending on whether the U.S. government is running a surplus or deficit and the size of the deficit.
The effects of the collateral shortage have not been severe in recent years. Last year, there was no collateral shortage.
Effects of The FRRP
This year, however, there’s a new factor at play – The Fixed-Rate Reverse-Repo facility....MORE
