(Bloomberg) Janus Henderson Group LP sees a trading opportunity in the global dollar shortage that triggered a surge in overnight repo rates this week.
The firm’s $1.1 billion Janus Short Duration Income exchange-traded fund, which trades under the ticker VNLA, entered into $35 million worth of dollar-yen forward contracts this week that expire on Oct. 1, according to the ETF’s latest holdings data.
Lending out dollars to hold yen cash for one week is currently on offer at a yield of 3.7% for greenback-based holders, according to Bloomberg data.
Dollar-funding strains often build around quarter-end, when banks dramatically reduce greenback-lending activity to meet regulatory requirements. That makes it profitable for U.S. funds to lend out their own dollars, and receive a “handsome yield” in return, according to Janus global bonds co-head Nick Maroutsos, who manages VNLA.
Thanks to this week’s surge in overnight repurchase-agreement rates, the funding stress is particularly elevated this time around, he said.
“The funding stress, which typically happens over quarter-end, is happening here as well,” Newport Beach, California-based Maroutsos said in an interview on Friday. “If you’re cash rich, you can have some very good short-term investments.”
Spiking rates forced the Federal Reserve to conduct overnight repo operations for a fourth straight day on Friday. That’s helped restore stability to the rates, which declined to more normal levels on Friday after soaring to 10% on Tuesday. The central bank announced today it will continue conducting the operations at least through Oct. 10.
However, as the third quarter draws to a close and banks prepare to start cutting back on providing liquidity, there is still a risk that the dollar-funding squeeze may worsen in the weeks ahead. That worry may explain why Thursday’s Treasury bill sale flopped, with investors demanding additional yield to be compensated for tying up cash.
To capitalize on the crunch, a dollar-based investor would sell the U.S. currency in the spot market and buy yen, while agreeing to sell the Japanese currency in the forward market at a fixed price. As of Sept. 19, more than 3% of VNLA’s holdings are in dollar-yen forward contracts to do exactly that.
While the U.S. is adding liquidity to stabilize rates, that won’t be sufficient to prevent an even more acute dollar-crunch at year-end, according to Maroutsos, so this type of opportunity may arise again in December.
“The market, the Fed, large asset managers that have been on the tape talking about the funding stress; I don’t think they fully comprehend what is fully going on in the market or recognize how big of a problem that can be,” said Maroutsos, who took over in March as lead manager of what had been Bill Gross’s bond fund at Janus. “Over year-end, I think we’re going to see this thing really move higher, both in repo and in currencies.”
