Repo rates quietly cool down, U.S. Treasury supply contracts, where will quarter-end liquidity go?

⑴ The overnight general collateral repo rate opened at 3.66% on Thursday, up 1 basis point from the previous day. Treasury settlement resulted in about $10 billion in outflows, causing some friction in the collateral market. However, institutions expect further upward pressure to be limited, with the intraday fluctuation range seen at 3.61% to 3.66%. As the weekend approaches, the overnight rate is also expected to soften. ⑵ The key to driving rates down lies in supply-side changes. Weekly Treasury issuance (1-2 month maturities) peaked at $280 billion in the third week of May, but has now fallen to $225 billion. This means that maturing debt will continue to exceed current issuance, and the released cash will seek a safe haven at quarter-end, thereby pressing down overnight rates. ⑶ In terms of the repo market structure, the premium of the 10-year Treasury over the general collateral repo rate has widened by 40 basis points to 125 basis points, while the 3-year and 30-year Treasuries are in line with the general collateral repo rate. Federal funds futures indicate a 97% probability that the US Federal Reserve will hold rates steady at the June meeting. SOFR futures opened up by 1.5 to 5.5 basis points, mainly driven by a 1.8% drop in spot oil prices following news of a ceasefire between Israel and Lebanon. ⑷ For short-term OIS, the 0x3 OIS expiring in September is quoted at 3.647%, up 0.5 basis points from the previous day. Based on the 10-day average SOFR rate of 3.59%, the contract price implies about a 23% probability of a 25 basis point rate hike in the next 90 days. As for Treasury auctions, the stop-out rate for the 4-month Treasury bill on Wednesday was 3.635%.