“People are nervous. People are scared right now. There is a scramble for funding, but I don’t think this will get out of hand,” said John O’Connell, a portfolio manager at Garda Capital Partners.
The state of play was highlighted by the movement of a measure of dollar-funding stress known as the FRA-OIS spread.
It rose from 0.26 percentage points on Thursday to as high as 0.38 percentage points on Friday (Saturday AEDT) before dipping to 0.35 percentage points.
That was its highest level since April 2020, but still well off its peak of nearly 0.8 percentage points in March 2020, or more than 2.1 percentage points during the 2008 financial crisis.
Rates on three-month commercial paper – which enable companies and banks to borrow from investors over short periods of time – also rose to about 0.6 per cent, but remained well below the levels hit when COVID-19 reached the US in early 2020.
Another positive indicator came from currencies such as the Mexican peso and South African rand, which would be expected to buckle in the event of a serious dollar funding shortage. They have both been relatively stable.
Markets were put to the test as governments imposed sanctions on Russia’s central bank, constraining its ability to access roughly $US630 billion ($855 billion) in foreign reserves, including dollars that it would normally be able to lend in funding markets.
Investors, bankers and analysts said the impact was mitigated by the existence of Fed programs that were set up during the pandemic to keep dollar-funding markets operating.
The standing repo facility, made permanent in July, allows US banks to swap Treasuries for dollars. The Foreign and International Monetary Authorities facility affords that same privilege to foreign central banks.
So-called swap lines allow foreign central banks to temporarily borrow dollars. In a sign other countries were able to access dollars, no foreign central bank had tapped FIMA as of Friday, and the usage of the swap lines remains minimal.
When asked by US legislators on Wednesday about dollar-funding markets, Fed chairman Jerome said they were “functioning well”. He said a “great deal of liquidity” was coursing through the system.
“Between our swap lines and our repo facility for other foreign central banks and our standing repo facility in the Treasury market, we have institutionalised liquidity provision,” he said.
Lorie Logan, an official in the markets group of the New York Fed, suggested that the existence of these liquidity facilities was enough to ensure smooth functioning, even as usage remained low.
“Their presence has also provided confidence in available liquidity, and that knowing these are operationally there … I think that has mitigated some of the cautionary demand for liquidity that might have emerged amid the heightened uncertainty,” she said.
Bankers also said they had been briefed in advance by US government officials about the possibility of sanctions on the Russian central bank, allowing them to prepare for any fallout.