Amid an escalating funding squeeze, the Fed stepped in to temporarily “solve” the problem.
With a massive spike in GC repo pulling effective fed funds higher, the New York Fed addressed the situation on Tuesday, announcing a $75 billion overnight repo operation “in order to help maintain the federal funds rate within the target range”. Here, visually, is the problem:
Tuesday’s action by the NY Fed was the first such operation in a decade (these were common prior to the institution of the post-crisis policy regime).
It was all at once an admission by the Fed that they had lost control, and an attempt to put a Band-Aid on the situation pending another IOER tweak and, eventually, the advent of a more permanent fix, whether that’s a standing repo facility or the restart of asset purchases.
Overnight repo traded at 7% on Tuesday after Monday’s “chaos”, underscoring the need for the Fed to do something in a hurry. As GC repo continued to press higher, it spilled over into other reference rates and manifested itself in other measures of funding stress.
Here’s the press release from the NY Fed:
This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion. Securities eligible as collateral in the repo include Treasury, agency debt, and agency mortgage-backed securities. Primary Dealers will be permitted to submit up to two propositions per security type. There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type, and are subject to a minimum bid rate of 2.10 percent.
Ostensibly, $75 billion should “do it”, so to speak, given estimates of a $50 billion funding mismatch, but as documented in the linked post above, this is going to be something that has to be addressed in a comprehensive way considering the structural factors at work.
Unfortunately, things didn’t go exactly according to plan. The operation was canceled due to “technical difficulties”, which were quickly resolved. Ultimately, it was reopened and the NY Fed took $53.2 billion of Treasurys and securities in the operation.
While some of the pressure should abate on its own, there are lingering questions about why things didn’t get better on Tuesday.
“The settling coupon auctions and corporate tax payments yesterday were a factor, and the inflated dealer balance sheets have also been an issue”, Stone & McCarthy wrote this morning, before noting that “the dealer balance sheet situation isn’t anything new, and with the auction settlements and tax payments in the rear-view mirror, we would have expected to see pressure ease”.
But it didn’t – ease that is.
“Instead, the opposite occurred, and we’re not entirely sure why there’s been such a sudden shift”, the same note reads.
Maybe Jerome Powell will have some answers on Wednesday.
|Operation Results for Tuesday, September 17, 2019
Last Updated: Tuesday, September 17, 2019 10:12 AM
Number of Operations Today: 2
|See announcement from Sept 17, 2019.
Deal Date: Tuesday, September 17, 2019