fed Markets

‘We’re Gonna Need A Bigger Boat’: First Of Three Term Repos Two Times Oversubscribed

Cue the "Jaws" jokes.

The first of three scheduled 14-day term repo operations was two times oversubscribed, suggesting some folks are indeed inclined to take the Fed up on its “generous” offer to ensure the acute funding stress that rippled across money markets last week doesn’t show up again into month- and quarter-end.

Some $62 billion in securities were submitted for the $30 billion operation. The NY Fed accepted $22.7 billion of USTs and $7.27 billion of of mortgage-backed debt. No agency debt was accepted.

The Fed announced the three term ops on Friday, along with a schedule for O/N repos, all in an effort to provide clarity and reduce uncertainty following a tumultuous week.

Read more: ‘A Whatever It Takes Signal’: Fed’s ‘Big Bazooka Of Liquidity’, Sets Up ‘QE-Lite’ In October

Fed officials are working to lay the groundwork for an announcement around the resumption of balance sheet expansion, or, “QE-Lite” as it’s been dubbed in its “organic” form.

John Williams on Monday said the FOMC “will assess the implications for the appropriate level of reserves and time to resume organic growth of the balance sheet consistent with the successful execution of the FOMC’s ample reserves framework”.

For his part, Jim Bullard isn’t sure reserve scarcity was the problem last week. In remarks to reporters following a presentation in Effingham, Illinois, on Monday, he said he favors a standing repo facility to address funding stress.

“The best part about having a standing repo facility is that you probably would not have to use it most of the time because its mere existence would stabilize trading”, Bullard remarked.

You can now consider that quotable in the context of a 2X oversubscribed 14-day operation which, you’re reminded, will need to be rolled in mid-October along with the other two term operations scheduled for this week, unless the Fed is keen on upsetting markets again and chancing the return of repo volatility.

Operation Results for Tuesday, September 24, 2019
Last Updated: Tuesday, September 24, 2019 08:15 AM
Number of Operations Today: 1
See announcement from Sept 23, 2019.

Deal Date: Tuesday, September 24, 2019
Delivery Date: Tuesday, September 24, 2019
Maturity Date: Tuesday, October 08, 2019
Type of Operation: Repo
Auction Method: Multiple Price
Settlement: Same Day
Term of Operation – Calendar Days : 14 Days
Term of Operation – Business Days : 10 Days
Operation Close Time: 08:15 AM

Results Amount ($B) Rate (%)
Collateral Type   Submitted Accepted Stop-Out1 Weighted
High Low
Treasury 36.400 22.732 1.90 1.961 2.05 1.85
Agency .200 .000 N/A N/A 1.90 1.90
Mortgage-backed 25.400 7.268 1.95 2.007 2.25 1.85
Total 62.000 30.000

8 comments on “‘We’re Gonna Need A Bigger Boat’: First Of Three Term Repos Two Times Oversubscribed

  1. jyl says:

    I didn’t realize repo was being accepted for MBS as well as UST. Not sure I like seeing that.

    The average rate for the UST repo was 1.96%. That is higher than the current yield curve on all maturities of UST, by 36bp to 16bp. I may (likely) not understand exactly how this works, but is it the case that banks were eager to pay a couple-few tens of bps for a 14 week repo?

    • Yes, and remember that is annualized yields so for 2 weeks divide by 26. Much cheaper than not being able to fund at all. Basically the FRB of NY is funding the current extraordinary US government deficit because the market has run out of liquidity at these levels which unfortunately appears to be the new ordinary.

      • mfn says:

        If that’s true, and given Trump’s fine Mussolini impersonation in front of the UN today, doesn’t that kind of make us a banana republic? #MAGA

      • jyl says:

        So QE-lite is basically going to be the Fed buying $150-250BN/yr of Treasuries to help fund the deficit that is >$1.0TR now and will be >$1.5TR in the next recession.

      • Vicissitude says:

        I’ve been pondering that this recent liquidity problem, isn’t really a Fed thing, but a Treasury thing, and maybe this issue is being twisted in some way for politics or PR. Like 100’s of millions of people, I have substantial doubts about the dark forces running our empire and there is the chance this might be about adjusting the out-of-control deficit. Seems like a long shot, but then again, the 100 year treasury crap tossed at the wall is (also) being laughed at.

        One issue for Fed collateral is the quality of assets and thus that’s where Treasury comes into play, as the de facto brand used in repo.

        There are many things in the mix, in terms of collateral and I think this was from IMF:

        “But, as underlined in Klee
        et al (2017), borrowing a HQLA asset via a reverse repo does not change the LCR ratio:treatment of collateral in case of repo transactions for LCR purposes implies that lending in the repo market (in which the underlying collateral is in the HQLA category) has no effect on a bank’s LCR. Overall, the marginal effect of the LCR implementation is expected not to be material on repo rates in the US. The consequence of LCR ratios
        enforcement on HQLA assets expected returns in the US is studied in Duffie and Krishnamurthy (2016).”

        Also consider: The Fed and a Standing Repo Facility: A Follow-Up

        Friday, April 19, 2019

        Since the financial crisis, banks are now using reserves to help meet liquidity regulations, such as the liquidity coverage ratio (LCR) and resolution planning. While U.S. Treasuries are given equal weight with reserves in the calculation of high-quality liquid assets (HQLA) for the LCR, they are evidently not considered equivalent for resolution purposes.

        Internal liquidity stress tests apparently assume a significant discount on Treasury securities liquidated in large volumes during times of stress, so that Treasuries are not treated as cash-equivalent. We have heard that banks occasionally feel under supervisory pressure to satisfy their HQLA requirements with reserves rather than Treasuries.

        This whole mystery doc (below) is from a few years ago, but it may provide a wider perspective on what might be going on with tri-party agreements and the great possibility that someone at Treasury wants to manipulate arbitrage and influence something in some weird dark way …

        Fed reverse repo, raising
        rates, and related
        The Fed’s reverse repo facility provides
        certain front-end investors – critically
        money funds and GSEs – access to the
        Fed and offers a T-bill-like substitute.
        • Currently capped at $300bn (still in
        testing); term operations boosted
        capacity at recent quarter-ends
        During the substantial T-bill supply
        reduction in spring 2014, RRP usage
        picked up substantially and appeared
        to succeed in supporting yields.
        RRP is expected to help the
        normalization process, but questions
        remain regarding size and duration of
        the facility.
        • If RRP did not exist or were
        inadequate during rate hikes, bank
        balance sheet reductions at
        quarter-end, or other stress points,
        T-bill yields may be driven lower
        and risk significant market

        Alternatively, considering new auction tenors could provide additional points of price discovery, enhancing liquidity
        and avoiding ballooning individual auction sizes, particularly down the road as deficits grow.

        Rollover risk in the future may be more

        If more bills are issued in lieu of long-term
        Treasury benchmarks , the liquidity of fixed
        income assets may be significantly reduced

        Balance sheet constraints (leverage ratios) may
        make market making more difficult,
        subsequently challenging bill liquidity, in
        particular around quarter-end


  2. Anonymous says:

    Meanwhile Australia returned to surplus last week…

  3. Vicissitude says:

    Furthermore, let’s not get overly excited about the SRF, FYI:

    While assets are considered HQLA in part because they should be reasonably easy to monetize at any time of the day, rapidly turning very large quantities of assets—even Treasury securities—into cash could be challenging. One problem is operational, as it might be difficult to find counterparties willing to purchase or repo unusually large quantities of assets on the same day an outflow occurs. Another issue is that potential counterparties may perceive an attempt to monetize a large quantity of assets as a signal of stress and, in response, hold on to their cash in case they need it later. Or they might bargain aggressively if they believe that the bank is desperate to sell, causing banks to accept extremely low prices. In turn, these fire-sale prices could spill over to the broader financial system by causing related security prices to crash as well.

    An alternative to monetizing securities is for banks to hold reserves in their central bank accounts. Reserves don’t need to be turned into cash, since they are cash, and are readily available to meet sudden outflows. Moreover, they are not constrained by the closing time of securities settlement systems. Our analysis highlights the trade-off between reserve supply and monetization risk. Low levels of reserves imply a high reliance on banks’ ability to monetize securities in a systemic event, whereas higher levels of reserves could reduce the banking system’s need to monetize securities in a stress event. Having a high supply of reserves, as has been the case since the crisis, may have important financial stability benefits that should not be overlooked.


  4. Vicissitude says:

    This is probably the best way to kill a thread, by beating an unloved dead horse, but as I dig deeper and deeper, I’m ending up with a conspiracy theory, or maybe a whole new way to piss off Mr. H?

    I’m thinking this who;e enchilada is about Regulatory Capture, with the list of conspirators being Treasury/trump admin/banking industry/wall street all gaming The Fed, if the Fed isn’t also involved. My theory starts with the premise that the Fed started paying interest on repo crap shortly after The GR started and thus a fine mechanism has been in place to help banks, et al hoard reserves. Then somewhere along the way we have Dodd-Frank Act with lots of cool ways to make sure banks actually have liquid assets, and as such, big failing banks were required to write living wills, explaining how they will prevent taxpayers from bailing them out again, after the y screw up again. Enter trump and all the evil parasites, including his lap puppet at Treasury, all of whom want to gut Dodd-Frank and reserve rules and Basil 3 or whatever the hell .. and you start to get a hint that if banks can get off the hook by having weaker reserves and if Treasury can slop off a bunch of debt onto The Fed balance sheet, maybe that helps the deficit, maybe it keeps rates lower and it probably helps everyone play the game of arbitrage a little easier, making it a more profitable game for a tight bunch of dudes.

    This is what happens when you play on the internet, maybe this is the foundation of a new song, script or play, but it all smells so fishy and so rotten …

    In closing:

    “Dodd-Frank was something they said could not be touched. And honestly, a lot of great Democrats knew that it had to be done and they joined us in the effort,” Trump said before he signed the bill, surrounded by lawmakers from both major parties. “And there is something so nice about bipartisan, and we’re going to have to try more of it. Let’s do more of it.”

    The measure eases restrictions on all but the largest banks. It raises the threshold to $250 billion from $50 billion under which banks are deemed too important to the financial system to fail. Those institutions also would not have to undergo stress tests or submit so-called living wills, both safety valves designed to plan for financial disaster.

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