Record Federal Reserve auction suggests more problems for credit, mutual funds in 2016

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Something big is happening in the money markets–and it could be a harbinger of further hemorrhaging in the credit markets. It could also indicate there are more problems lingering beneath the surface of the mutual fund industry.

Three curious events at year-end

First, on December 31, 2015, the Fed sold an unprecedented $475 billion in Treasury securities to banks, brokers and funds through its reverse repo facility. This was the highest amount sold through the facility and was 40% greater than the prior high 18 months ago.

Second, a key money market reference rate, the general collateral finance (GCF) repo rate, recently shot to 0.55%, which is sharply above the Federal Reserve’s upper target of 0.50% for the Fed Funds rate.

Third, according to preliminary data from banks, the actual Fed Funds rate crashed to 0.12% as of year-end, which is far below the minimum 0.25% floor the Fed is targeting. Although it is normal for the Fed Funds rate to dip lower at quarter-end and year-end because of peculiarities of the Fed Funds market itself, a divergence this great was unexpected.