# Analysis-Investors face expensive quest for year-end cash and safe assets
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-11-14
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Year-End Volatility: Challenges in Banks for Cash &
Meta Description: Navigate the challenges of volatile markets, high inflation, and central bank rate hikes. Secure cash and assets for a smooth transition into 2023.
URL: https://financedigest.com/analysis-investors-face-expensive-quest-for-year-end-cash-and-safe-assetshtml

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By Yoruk Bahceli

(Reuters) – 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 U.S. gauges of market volatility back at levels seen at the height of the COVID-19 pandemic and an uncertain economic outlook, it is harder than [normal for banks](https://www.financedigest.com/how-banks-can-triumph-in-the-new-normal.html "HOW BANKS CAN TRIUMPH IN THE ‘NEW NORMAL’") to take risk on their balance sheets.

Money [markets too suggest securing cash and quality assets](https://www.financedigest.com/theresa-may-brexit-and-risk-and-safe-assets-a-snapshot-of-global-financial-markets.html "Theresa May, Brexit and risk and safe assets: A snapshot of global financial markets") 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](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies") strategy at Commerzbank.

GRAPHIC: 2022 quarter-end repo rates historically expensive (https://graphics.reuters.com/GLOBAL-MARKETS/jnpwyegyqpw/chart.png)

German repurchase agreements – where investors borrow collateral, usually government bonds, in return for cash – have implied rates of some minus 10% for the year-end, the International [Capital Market Association said in a late October letter calling on the European Central Bank](https://www.financedigest.com/austrian-regulator-orders-system-relevant-banks-to-up-capital-buffers.html "Austrian regulator orders system-relevant banks to up capital buffers") to act.

Such deeply [negative repo rates](https://www.financedigest.com/ecb-goes-big-with-50-basis-point-hike-ending-negative-rates-era.html "ECB goes big with 50 basis-point hike, ending negative rates era"), which compare with minus 4.5% on Dec. 31 last year according to CME Group, reflect the high cost of borrowing German bonds as a collateral shortage plagues [euro zone](https://www.financedigest.com/euro-zone-inflation-seen-just-above-ecbs-target-in-2025-poll-shows.html "Euro zone inflation seen just above ECB’s target in 2025, poll shows") bond markets. ECB [bond purchases have left a tiny amount of German debt available for asset](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way") managers.

Germany’s debt agency head Tammo Diemer 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](https://www.financedigest.com/virgin-orbit-says-space-startup-in-talks-with-potential-investors.html "Virgin Orbit says space startup in talks with potential investors") losses.

A similar collateral shortage in Britain is holding repo rates well below the 3% policy [rate and may lead the Bank of England](https://www.financedigest.com/bank-of-england-officials-split-over-future-path-for-rates.html "Bank of England officials split over future path for rates") to intervene, according to NatWest Markets.

In the United States, the premium on year-end interbank borrowing, measured by the difference between so-called FRA-OIS spreads for December and March, has been [priced in much higher throughout the year](https://www.financedigest.com/hong-kong-home-prices-drop-15-6-in-2022-snap-13-years-of-gain.html "Hong Kong home prices drop 15.6% in 2022, snap 13 years of gain") than average levels seen in the past five years, BofA noted in October.

GRAPHIC: December FRA-OIS premium over March (https://fingfx.thomsonreuters.com/gfx/mkt/gdvzqyrqrpw/bofa%20fra%20ois.png)

In cross-currency basis swaps, where investors swap euros, yen and [Swiss francs](https://www.financedigest.com/swiss-franc-grapples-with-safe-haven-identity-crisis-after-credit-suisse.html "Swiss franc grapples with safe-haven identity crisis after Credit Suisse") for U.S. dollars, the relative premium to obtain dollars widened to the [largest since](https://www.financedigest.com/first-quarter-dash-for-cash-largest-since-early-2020-bofa.html "First quarter ‘dash for cash’ largest since early 2020 -BofA") the height of the COVID-19 pandemic in March 2020 at end-September, when they started to factor in year-end.

That premium rises sharply every year at end-September, but the scale of this [year’s move on the euro-dollar swap was the largest since](https://www.financedigest.com/japans-emperor-gives-first-public-new-years-greeting-since-2020.html "Japan’s emperor gives first public New Year’s greeting since 2020") 2008, according to ICAP data.

It’s a sign that demand for [dollar funding over year-end is really strong and probably stronger](https://www.financedigest.com/oil-slumps-on-economic-data-stronger-u-s-dollar.html "Oil slumps on economic data, stronger U.S. dollar") than previous years, at least relative to the ability of the market to accommodate that demand,” ING senior rates strategist Antoine Bouvet said.

The premium has eased sharply, also after Thursday’s U.S inflation data surprise prompted a rethink on Federal Reserve rate [hike bets](https://www.financedigest.com/analysis-investors-stick-to-bets-on-early-end-to-ecb-hikes-as-uncertainty-grows.html "Analysis-Investors stick to bets on early end to ECB hikes as uncertainty grows"). But analysts noted year-end is still 1-1/2 months away and the spread tends to widen in late November as demand for [cash rises](https://www.financedigest.com/european-banks-cash-in-on-rising-rates-as-clouds-gather.html "European banks cash in on rising rates as clouds gather").

The [risk is any unexpected news emerging](https://www.financedigest.com/mcafee-highlights-emerging-cybersecurity-risks-associated-with-blockchain.html "McAfee Highlights Emerging Cybersecurity Risks Associated with Blockchain") as liquidity thins further in December, requiring investors to reconsider positioning.

You have to be more careful about positioning to carry over to the new year, even more than the years before,” said Dalibor Jarnevic, head of government [bond trading at DZ Bank](https://www.financedigest.com/bank-of-england-says-it-will-unwind-bond-market-intervention-once-risks-have-subsided.html "Bank of England says it will unwind bond market intervention once risks have subsided").

Jarnevic noted the ECB’s Dec. 15 meeting, a day after the Fed, poses a particular [risk should it surprise markets](https://www.financedigest.com/german-residential-property-market-faces-risk-of-price-drop-diw-study.html "German residential property market faces risk of price drop – DIW study").

Normally until that point…the [investor base has already done their basic](https://www.financedigest.com/investors-go-back-to-basics-with-simpler-self-driving-vehicles.html "Investors go back to basics with simpler self-driving vehicles") positioning to the year-end and trading volumes already tend to be very low,” he said. This might bring people in a position to accept [prices which they are not used to in the government](https://www.financedigest.com/carrefour-unveils-30-euro-shopping-basket-in-spain-after-government-price-cut-proposal.html "Carrefour unveils 30 euro shopping basket in Spain after government price cut proposal") market.

ON GUARD

Britain’s September budget [turmoil highlighted how a shock event hitting when liquidity is already poor can destabilise a market](https://www.financedigest.com/spains-santander-reaffirms-targets-in-face-of-recent-market-turmoil.html "Spain’s Santander reaffirms targets in face of recent market turmoil").

[Policymakers are alert to the risks](https://www.financedigest.com/euro-zone-bond-yields-fall-as-ecb-policymaker-flags-recession-risk-gilts-eyed.html "Euro zone bond yields fall as ECB policymaker flags recession risk, gilts eyed").

Germany’s [debt agency recently expanded holdings of its own bonds](https://www.financedigest.com/green-bonds-are-set-to-drive-corporate-esg-debt-out-of-slump-in-2023-barclays.html "Green bonds are set to drive corporate ESG debt out of slump in 2023 -Barclays") by a chunky 54 billion euros to lend out to investors on the repo market. The [ECB on Thursday increased the bonds it lends against cash by 100 billion euros](https://www.financedigest.com/digital-euro-will-be-free-but-limited-in-scope-ecb-says.html "Digital euro will be free but limited in scope, ECB says").

Analysts said these moves would [ease year-end pressure](https://www.financedigest.com/analysis-china-central-bank-under-pressure-to-ease-is-hemmed-in-by-inflation-fed-jitters.html "Analysis-China central bank, under pressure to ease, is hemmed-in by inflation, Fed jitters"), but noted potential constraints. End-2021 still saw [significant pressure even after both institutions](https://www.financedigest.com/aon-report-identifies-significant-new-threats-facing-financial-institutions.html "Aon report identifies significant new threats facing financial institutions") intervened.

BofA said it now sees year-end [German repo 6 percentage points below the overnight rate](https://www.financedigest.com/german-inflation-rate-to-ease-over-course-of-2023-econ-minister.html "German inflation rate to ease over course of 2023 – econ minister"), which it said would still make it the most expensive on record for investors borrowing bonds then. The overnight rate is currently at 1.4%.

It’s still early days, but ( [last year’s](https://www.financedigest.com/uk-new-car-sales-rise-in-january-full-year-sales-to-top-last-year-smmt.html "UK new car sales rise in January, full-year sales to top last year – SMMT") repo pricing) would probably be the best case already in terms of year-end pricing,” Commerzbank’s Leister said.

(Reporting by Yoruk Bahceli; editing by Dhara Ranasinghe and Emelia Sithole-Matarise)


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