The first of the Fed’s “ultra-long” term repos was two times oversubscribed on Monday, a development which will be pitched as wholly unimportant, totally expected or a blaring ambulance siren, depending on whose take you’re inclined to believe.
As a reminder, the Fed announced the new schedule a couple of Thursdays ago, and it didn’t exactly come as a surprise that they offered tenors beyond the 14-day operations they began conducting alongside the O/N ops necessitated by the September funding squeeze.
There are plenty of folks who continue to fret about the possibility of the September episode repeating at year-end. BofA’s Mark Cabana, for example, has variously warned about a “combustible cocktail” of reserve shortage and dealer intermediation constraints related to GSIB.
Read more: Analyst Who Called Funding Squeeze Not Blown Away By Fed’s Longer-Term Repos
The Fed took $49.05 billion in bids for the first of two 42-day term operations on Monday.
| Results | Amount ($B) | Rate (%) | |||||||||
| Collateral Type | Submitted | Accepted | Stop-Out1 | Weighted Average2 |
High | Low | |||||
| Treasury | 33.550 | 19.250 | 1.60 | 1.643 | 1.73 | 1.57 | |||||
| Agency | 5.000 | .000 | N/A | N/A | 1.60 | 1.59 | |||||
| Mortgage-backed | 10.500 | 5.750 | 1.62 | 1.632 | 1.64 | 1.59 | |||||
| Total | 49.050 | 25.000 | |||||||||
That’s sure to spark some alarmist rhetoric from the peanut gallery, and I suppose what we would note is that demand for funding isn’t materially receding despite outright purchases of T-Bills.
“The limited change in Fed repos since the start of bill purchases in October implies that UST leverage has not been reduced or the market is challenged to finance ongoing UST supply”, BofA’s Cabana said when the New York Fed first announced it would add a pair of 42-day (and one 28-day) operation to the schedule.
Monday’s O/N operation, on the other hand, was undersubscribed. This is in keeping with precedent. Uptake has averaged around $73 billion on a daily basis since the cap on the O/N operations was lifted to $120 billion. Meanwhile, usage of the term repos has, on average anyway, been maxed out.
“Setting our sights toward year end, we expect dealers to increase participation in the term repo operations to secure cheap funding from the Fed over the turn [and] this likely to lead to higher, if not over 100%, subscription of term repo”, Deutsche Bank said Friday.
(Deutsche Bank)
The bank’s Steven Zeng offers a bit of perspective on things that could easily be lost in the proverbial shuffle. “[Monday is] the first term repo offered to primary dealers for funding over year-end [and] it will provide a glimpse into how much dealer banks are willing to commit their balance sheet over the December 31 reporting date”, he said, adding that “a weak participation could suggest G-SIB banks are foregoing additional repo trades to avoid moving into a higher G-SIB bucket or European banks are looking to reduce capital charge under the leverage ratio”.
That, in turn, suggests that undersubscribed operations would be a warning sign. As Zeng goes on to note, undersubscriptions “could mean that Fed’s repo operations may be ineffective at helping distribute liquidity across the system around year-end”.
(Deutsche Bank)
In any event, more attention will likely be paid next week, when the second 42-day operation will be set against Treasury settlements.
