Treasury Holdings Hit Two-Year High

US Treasury dealers have increased their net holdings of short-term securities to the highest level in two years. This data comes from a Federal Home Loan Bank of New York update released on October 23.

The rise in inventories puts the funding capacity of these intermediaries under observation. The situation gains relevance as October 30 approaches. On this date, the market expects specific pressures related to the fiscal year-end of Canadian banks and payments on mortgage-backed securities.

The Federal Home Loan Bank notes that heavy debt issuance and money market fund strategies explain the widening of spreads. Many investors chose to shorten durations due to uncertainty regarding Federal Reserve monetary policy. Some capital migrated to repurchase agreements, known as repos, which helps stabilize overnight funding.

Federal Reserve studies suggest that the transfer of liquidity to leveraged borrowers expands dealer balance sheets. This process may increase the compensation required by intermediaries to maintain operations. So far, short-term funding conditions remain under control.

The benchmark for Treasury-backed loans, the SOFR, recorded 3.9% on October 22. This value remained aligned with the interest rate on reserve balances set by the US central bank. The market is monitoring whether the rate will test this level more consistently in the coming days.