By Ray Birch
LAKE FOREST, Ill.—Credit unions should be paying attention to what’s happening in the repurchase agreements (repos) market, as it’s directly impacting money market deposit account pricing, says one economist who believes a volatile rate environment could be ahead in 2020.
“On September 16, two dramatic rate spikes happened: Repurchase agreements rates went from about 2% to 10%, and simultaneously (money market deposit account-MMDA) rates dropped over 5% the first week and 10% in two weeks,” explained Michael Moebs, economist and CEO of Moebs $ervices, which performed the rate study. “These are significant rate shifts.”
Moebs said the repos market spike increased borrowing costs $876 Million for the day, and for MMDAs about $15 billion for the year. A repo is a secured loan made by banks, credit unions and corporations with each other to buy or sell excess balance sheet funds. On average, repos transactions total about $4 trillion a day. Total MMDA balances are about $8 trillion for all depositories for the past year, Moebs said.
“While the vast majority of credit unions are not directly in the repos market, changes in that market do affect deposit rates,” said Moebs. “In this case many credit unions of all asset sizes decreased the rate for money market deposit accounts. Only five weeks earlier some credit unions increased their MMDA rate.”
The Root Cause
Moebs examined the root cause of the repos market rate spike, saying on Sept. 16 the U.S. Treasury sold $75 billion in bonds.
“That day was also the deadline for quarterly tax payments by corporations and final settlement of 2018 for individual taxes,” he explained. “The Moebs study estimates, conservatively, $200 billion flowed into the government from all sources in the few days around Sept. 16. Yet, these inflows were not sufficient to satisfy the huge need by buyers, or those needing repos funds. In response to the very short-term repos spike, money market deposits at banks and credit unions holding plenty of these deposits responded quickly with much lower rates.”
Moebs emphasized that repos are a riskier market.
“Therefore, when repos rates jump up high there is risk being expressed,” said Moebs. “Depositories effectively say, ‘Lots of risk repos holders? Come home to momma who is riskless, and, oh, we are lowering our rates because we are riskless.’”
Response Strategies
What can credit unions do to avoid price spikes and volatility? Moebs outlined strategies that include:
- Accumulate as much long-term funds, such as certificate of deposit as possible with terms of one year or longer. “This will provide stable funds no matter how many spikes,” Moebs said.
- Keep short-term fund rates as low as possible without deposits running off. If deposits show a glimmer of runoff, increase rates. “This will keep the overall cost of funds low,” he said.
- If a spike happens, consider immediately offering a high rate, long-term deposit of 12 months or longer. “This will pick up new funds from stocks and bonds as savers seek deposit insurance,” Moebs said.
“Whether you follow the above plan, or another, avoid playing the Fed rate game,” said Moebs.