The Federal Reserve Bank of New York’s operation to inject cash into the financial system over the end of the year was oversubscribed on Monday, indicating a thirst for year-end funding.
Market participants submitted US$49.05 billion in bids for the Fed’s 42-day term repo operation, which matures Jan. 6, 2020. That was more than the US$25 billion on offer. This was the first of three term operations to provide funding past the year-end period. The others will be held in the coming weeks.
Even with the Fed’s commitment to continue providing liquidity to the financial system around year-end, the market is still showing concerns. This is due to banks’ year-end balance-sheet constraints related to capital surcharges and other regulatory requirements.
“This uniquely provides funding over both November month-end and December year-end,” said Thomas Simons, a money-market economist at Jefferies. “This was a very attractive 42-day period to get cheap funding, for sure. The next few 42-day operations are smaller than this one, so there is some premium for ensuring that funding is secured early for fear of being outbid later on.”
The central bank has been injecting liquidity into the funding markets since Sept. 17, when the rate on overnight general collateral repo jumped to 10 per cent from around two per cent. The Fed has also begun buying Treasury bills to add reserves into the system.
The end of year repo rate in the market traded at 3.40 per cent Monday, according to Curvature Securities. The current overnight rate for general collateral repo as about 1.59 per cent, ICAP data show.
At Monday’s term operation, the Fed accepted US$19.25 billion of Treasuries at a stopout rate of 1.60 per cent and the weighted average rate was 1.643 per cent. It accepted no agency debt, but took US$5.75 billion of mortgage-backed debt at 1.62 per cent, with a weighted average rate of 1.632 per cent.
For Jefferies’ Simons, Monday’s operation doesn’t indicate “near-term desperation for funding,” but with the risk of year-end being “a little bit sketchy,” it presented “a very good opportunity.”
The Fed also conducted an overnight operation Monday, injecting US$68.5 billion into the system. This, like other similar operations conducted recently, was less than the maximum offering size of US$120 billion.