The Fed is starting to come to terms with the idea that the funding squeeze which rippled across money markets this week to the apparent surprise of policymakers isn’t likely to abate in the absence of a concerted effort that suggests the problem is being accorded the concern it deserves.
Friday’s overnight repo (which marked the fourth-consecutive day of liquidity injections) was oversubscribed, albeit to a lesser degree than Thursday’s operation, underscoring persistent jitters, even as funding rates show the stress is abating.
On Thursday evening, BofA’s Mark Cabana warned of “collateral damage” in the form of rolling stop-outs and messy unwinds in leveraged rates trades further out the curve if repo funding levels remained elevated.
Read more: Fed Risks Stop Outs, ‘Disorderly Unwinds’ In Slow Response To Funding Squeeze, One Bank Warns
“A term repo or NY Fed schedule of expected O/N repo operations similar to what is done for USTs would help ease this fear”, Cabana went on to say, suggesting what actions could be taken to allay concerns that the Fed might stop conducting the ad hoc operations or fail to provide sufficient liquidity when they are held.
Fast forward to a few hours after Friday’s operation and sure enough, the New York Fed released a schedule which includes a trio of 14-day term operations clearly aimed at getting markets through the expected month- and quarter-end squeeze.
“The Open Market Trading Desk will conduct a series of overnight and term repurchase agreement operations to help maintain the federal funds rate within the target range”, the New York Fed said, in what amounts to an admission that those who have been fretting about things getting worse over the next 10 or so days are probably correct. Swap spreads widened on the news.
Below, find the schedule and do note that although this helps, it still doesn’t solve the longer-term problem – it’s just a bigger Band-Aid, in lieu of an announcement on balance sheet expansion or a standing facility.
Via the New York Fed
The Desk will offer three 14-day term repo operations for an aggregate amount of at least $30 billion each, as indicated in the schedule below. The Desk also will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, until Thursday, October 10, 2019. Awarded amounts may be less than the amount offered, depending on the total quantity of eligible propositions submitted. Securities eligible as collateral include Treasury, agency debt, and agency mortgage-backed securities. Additional details about the operations will be released each afternoon for the following day’s operation(s).
After October 10, 2019, the Desk will conduct operations as necessary to help maintain the federal funds rate in the target range, the amounts and timing of which have not yet been determined.
| OPERATION DATE | OVERNIGHT | 14-DAY TERM | TERM MATURITY DATE |
| Monday, 9/23/2019 | $75 billion | No term operation | |
| Tuesday, 9/24/2019 | At least $75 billion | At least $30 billion | Tuesday, 10/08/2019 |
| Wednesday, 9/25/2019 | At least $75 billion | No term operation | |
| Thursday, 9/26/2019 | At least $75 billion | At least $30 billion | Thursday, 10/10/2019 |
| Friday, 9/27/2019 | At least $75 billion | At least $30 billion | Friday, 10/11/2019 |
| Monday, 9/30/2019 — Thursday, 10/10/2019 | At least $75 billion | No term operations |
For Monday, September 23, 2019, the Desk will conduct an overnight repo operation for an aggregate amount of up to $75 billion. The operation will be conducted from 8:15 AM ET to 8:30 AM ET. 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 1.80 percent.
Cabana is late to the party:
There are other, more complicated variants, such as having the Treasury restart its “supplementary financing account” by issuing T-bills and depositing the proceeds at the Fed, but that would run into issues with the debt ceiling and appropriations.)
There seem to be political realities in “treasury vs reserve” debate that are rarely discussed. Reserve interest paid to banks comes from the Fed. Interest paid to the fed from treasuries is returned to the govt. Thus, flipping holdings makes the US budget situation look worse.
https://www.barrons.com/articles/how-the-treasury-could-help-free-up-the-fed-51551372285
I can promise you that Cabana isn’t “late” to any “parties”. Readers have a rather pernicious (and strange) habit of assuming that just because they just heard somebody’s name, that person didn’t exist previously. Which of these alternatives do you imagine is more likely?.. 1) he and other front-end rates strategists have been writing about every aspect of this day in, day out, week in, week out, in literally thousands of notes for years on end because that’s their job or 2) Barron’s is the recognized authority on money markets? (Hint: 1) is correct)
Also, it would be helpful for other readers if you’d use the same username when commenting. You leave dozens upon dozens of comments here (many of which are constructive and welcome) on a fairly regular basis and although I can see they are all from you, other readers cannot because you use a collection of usernames.
The comment below is a good example. “Clarabel Woody” is you too.
On that note, H, is there a way to tell the differences between the “anonymous” usernames? Color coded or numbered?
Mr. H — I apologize for my bad habit of creating unique identities, it’s a psychological problem rooted in my lifelong identity crisis.
As far as “the party goes” I should have been more clear and to have not appeared to show disrespect for Mr. Cabana. I intended to indicate that the Barron article from Feb. 28, 2019 was somewhat ahead of the curve with ideas on how the Fed might manage an impending situation like we have recently seen this week. In all honesty I was reading something from a dude named George Selgin, who apparently thought the following idea (from Barron) was interesting:
“There are two elegant solutions to this problem, as I was reminded while reading a fascinating interview between David Beckworth, a senior research fellow at George Mason University’s Mercatus Center, and Peter Stella, a former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund. The Treasury could issue a few trillion T-bills to buy back the notes and bonds held on the central bank’s balance sheet, or, alternatively, the Treasury could give the Fed a few trillion in T-bills in exchange for the Fed’s portfolio of notes and bonds.”
That statement (above) sort of (un-wisely) intersected with my fast read from Cabana which said: ”
“A term repo or NY Fed schedule of expected O/N repo operations similar to what is done for USTs would help ease this fear”, Cabana went on to say,”
Again, I’m sorry and guess I need to stick with one iconic identity, perhaps something like Vicissitude. I’m currently exploring the worlds of hoarding, collateral, term premia, rehypothecation and future value.
Your blog is very well written and researched and I enjoy the snarky and witty additions to material that is often overly dry, like stale cat food.
The Fed has a tsunami of Boneheads with nose rings, maybe trump should cut their budget and have a mass layoff and flush the sewer then drain the swamp and then provide his tax returns, etc…
Here’s some clarity on this mess:
Perhaps the St. Louis Fed should speak more with the San Francisco Fed. While the St. Louis Fed is clearly blaming the failure of the Fed policies to produce meaningful economic growth on private ‘hoarders’, the San Francisco Fed very correctly described here that it is the Fed’s own interest on reserves rate policy (IORR) implemented in 2008 that led to the ‘hoarding’ of money, not by private individuals, but by the Fed member banks themselves, at the Fed.
“Once the Fed was authorized to pay interest on reserves, the relationship between the levels of required reserves and excess reserves changed dramatically. For example, required reserves averaged almost $100 billion during the first six months of 2012, while excess reserves averaged $1.5 trillion!… the Fed can change the rate for interest on reserves to adjust the incentives for depository institutions to hold reserves to a level that is appropriate for monetary policy”
https://thesoundingline.com/the-velocity-of-money-a-cautionary-tale/
Not terribly sure how you cut the budget of the people who literally create money…
This isn’t about liquidity, it’s about composition of said liquidity. The banks can hold there required liquidity in reserves and in select other stuff like Treasury bonds. The Fed is swapping Treasury liabilities (bonds) for Fed liabilities (reserves). This was common before the post GFC state of tons of excess reserves. It’s of no consequence (unless the Fed for some reason didn’t facilitate the altering of the composition of liquidity). Please, tell me if I’m missing something.
It has been reported that Williams initiated investigation into why banks were hoarding reserves. I would suggest he investigate why the NY Fed markets desk was caught with their pants down and why the Fed reacted so slowly to the problem. The events since last Friday suggest the Fed shrank the balance sheet too much. For the life of me, I could not understand why they shrank it at all. A friend in the markets suggested that it was political- to quiet the right who hates the Federal Reserve as a representation of federal power. The Fed could have left the balance sheet alone and let the balance sheet shrink as a percentage of nominal GDP over time. Much better to control growth through rates anyway. I have seen estimates that suggest each 400-600 billion of balance sheet shrinkage was equivalent of 1/4% rate increase. I believe controlling monetary policy while changing two metrics at once is also untried and probably more difficult.