By Yoruk Bahceli
As the most volatile period in years for traders draws to a close, the year-end dash for cash and high-quality assets will likely prove more challenging than usual in markets buffeted by decades-high inflation and aggressive central bank rate hikes.
The approach of year-end typically sees high demand to place or obtain cash as financial institutions seek to bolster their balance sheets, rebalance portfolios and transfer funds to close the year off.
But this year, with US gauges of market volatility back at levels seen at the height of the COVID-19 pandemic .MOVE and an uncertain economic outlook, it is harder than normal for banks to take risk on their balance sheets.
Money markets too suggest securing cash and quality assets investors need to make a smooth transition into 2023 will be expensive.
“When you look at the three-quarter ends this year and compare them to the previous years, each one has been significantly more expensive than in the past,” said Michael Leister, head of interest rate strategy at Commerzbank.
German repurchase agreements – where investors borrow collateral, usually government bonds, in return for cash – have implied rates of some minus 10 percent for the year-end, the International Capital Market Association said in a late October letter calling on the European Central Bank to act.
Such deeply negative repo rates, which compare with minus 4.5 percent on Dec. 31 last year according to CME Group, reflect the high cost of borrowing German bonds as a collateral shortage plagues euro zone bond markets. ECB bond purchases have left a tiny amount of German debt available for asset managers.
Germany’s debt agency head TammoDiemer said last month that year-end forward repo rates showed high demand as early as August, a result of investors posting record levels of collateral at clearing houses against potential losses.
