As a regular and active participant in the capital markets, Federal Home Loan Bank of San Francisco (FHLBank San Francisco) monitors on an ongoing basis relevant market data and activity. Below are certain observations about recent market data and activity.

Current State of the Repo Market

Funding Pressures: The repurchase agreement (repo) market has seen heightened activity, with periodic surges in volume. This uptick appears to be partly driven by increased basis trading, where investors exploit price differences between futures and cash Treasuries financed through repos. However, as the Federal Reserve Bank (Fed) continues to decrease its holdings of Treasury and mortgage-backed securities, that creates demand for the private market to fund these securities, more so as Treasury increases auction sizes for T-Bills. This trend shows up in reductions to the cash left at the Fed’s Reverse Repurchase Program facility or excess cash that isn’t utilized in other money market investments. Demand to finance other securities, like equities, also constrains the total amount of funding available via primary dealers, whose balance sheets cannot accommodate the total growth, leading to funding pressures. The market is forecasting repo to trade with a bid/ask of 5.45%/5.30%. Current repo is 4.70%.

Current State of Secured Overnight Financing Rate (SOFR)

• Recent Volatility: SOFR, which reflects the cost of borrowing cash collateralized by Treasury securities overnight, has exhibited recent volatility, particularly around quarter-end periods. For instance, on September 30, 2024, SOFR surged by 13 basis points, and an additional 9 basis points on October 1, indicating tightness in funding conditions.

• Federal Reserve's Position: Despite these fluctuations, the Fed has maintained that reserves remain abundant. A new measure introduced by the New York Fed confirmed this, aligning with expectations.

Expected Volatility Towards Year-End

• Historical Trends: Based on historical trends, FHLBank San Francisco generally expects year-end periods to see increased volatility in the repo market due to financial institutions adjusting their balance sheets for regulatory reporting. This can lead to spikes in SOFR as demand for liquidity rises.

• Market Expectations: Industry analysts anticipate that the repo market may experience similar pressures as the 2024 year-end approaches, potentially leading to further SOFR volatility. The Fed’s ongoing quantitative tightening and the reluctance of primary dealers to expand balance sheets could exacerbate these conditions.

Membership in FHLBank San Francisco provides access to funding solutions that allow our member institutions to effectively manage their year-end funding needs.

To learn more about FHLBank San Francisco credit products and solutions that may meet your year-end advance needs, members can contact the Member Services Desk today at (415) 616-2500 or contact your Relationship Manager. You may also view our pricing sheet on the Member Portal.