The Fed got the message – the Jaws jokes worked – “we’re gonna need a bigger boat”.
The New York Fed on Wednesday announced it has increased the size of both its term and overnight repos scheduled for September 26. The 14-day term operation will now have an aggregate limit of $60 billion compared to $30 billion, while the O/N operation will be for up to $100 billion, versus $75 billion previously.
The announcement follows a string of oversubscriptions, including Wednesday’s O/N operation, which saw dealers submit almost $92 billion in securities for the $75 billion agreement. On Tuesday, the first of three 14-day term repos was two times oversubscribed.
Read more: ‘We’re Gonna Need A Bigger Repo’
Former Minneapolis Fed chief Narayana Kocherlakota penned a Bloomberg Op-Ed on Wednesday that struck a decidedly worried tone.
Although he isn’t particularly concerned about the Fed achieving its goals and doesn’t seem to think last week’s money market chaos imperils the central bank’s ability to conduct monetary policy, Kocherlakota does think “something’s very wrong with the financial system”.
Essentially, he blames the post-crisis regulatory regime which he frets “has disrupted some of the system’s most basic functions”.
“Since the 2008 crisis, regulatory reforms have constrained the ability of flush banks to lend, and of tight banks to borrow [and] such constraints interact in complicated ways with financial market conditions”, Kocherlakota writes, adding that “reserves are siloed in the flush banks, so the financial system is acting more like it has $1.3 billion in excess reserves than the actual $1.3 trillion”.
Meanwhile, on the heels of Wednesday’s news of the upsized repos, Bloomberg flagged renewed interest in the SOFR-FF trade which has attracted attention amid recent dislocations.
“Spikes in the overnight SOFR-FF spread occur more frequently and are larger, particularly at month- and quarter-ends when dealers (and sponsored repo providers) temporarily step away from the market”, Barclays wrote Wednesday, weighing in.
“We think the old adage that every stove looks hot to a once-burned cat also applies in the repo market”, the bank went on to muse. “After last week, term and overnight SOFR ‘look hot’ – spreads should widen to fed funds to reflect what we consider to be a permanent random shock risk”.