What you need to know about the recent repo market turmoil
The Federal Reserve added another dose of liquidity to a vital corner of the funding markets Friday, helping stabilize rates as investors remain concerned that fresh bouts of stress may be felt in the weeks ahead.
The New York Fed injected another US$75 billion through an overnight repo operation. That followed operations of the same size on Wednesday and Thursday, and US$53.2 billion on Tuesday. The actions, commonplace in pre-financial crisis times, temporarily add cash, with the Fed taking government securities as collateral. Wall Street bond dealers submitted about US$75.6 billion of securities for Friday’s Fed action, lower than the previous day’s level.
“Given it was slightly oversubscribed and the rate was at 1.8 per cent, its shows the Fed is playing an important role in calming the market and needs to keep doing these operations,” said Priya Misra, head of global rates strategy at TD Securities in New York. “But overall, these operations are only a temporary fix, it’s a band aid. The big fear is that around quarter-end, when dealer balance sheets are more constrained that these Fed operations won’t work as well any more.”
The latest addition of liquidity -- with the Fed making clear it’s ready to do more as needed -- follows the Federal Open Market Committee’s move Wednesday to reduce the interest rate on excess reserves, or IOER, by more than their main interest rate -- all attempts to quell money-market stresses.
The operations have calmed the funding market, with repo rates declining to more normal levels after soaring to 10% Tuesday, four times last week’s levels. Overnight general collateral repurchase agreement rates remained steady Friday, trading around 1.90 per cent, according to ICAP.
However, there are signs of investor apprehension about future funding levels, which is manifesting in different ways.
Treasury bill sales on Thursday were met with a poor reception, as investors demanded to be compensated via higher yields for locking up cash. Meanwhile, in cross currency basis -- which show floating-rate payments in different currencies -- the premium for the Australian dollar over its U.S. counterpart collapsed by the most in eight years during Asian trading hours. And the rate on two-week repo, which would fund investors through the end of the quarter, is around 2.58%, ICAP data show.