Another Oversubscribed Term Repo Stokes More Year-End Liquidity Crunch Fears

The second of two 42-day term repos (i.e., guaranteed liquidity over year-end) was oversubscribed on Monday.

That will (again) serve as fodder for all manner of headlines featuring some arrangement of the words “rush”, “secure”, “cash” and “crunch”.

The New York Fed got $42.55 billion of bids for the $25 billion offering, which was upsized from $15 billion after the first 42-day operation was twice oversubscribed last Monday.

Deal Date: Monday, December 02, 2019
Delivery Date: Monday, December 02, 2019
Maturity Date: Monday, January 13, 2020
Type of Operation: Repo
Auction Method: Multiple Price
Settlement: Same Day
Term of Operation – Calendar Days : 42 Days
Term of Operation – Business Days : 28 Days
Operation Close Time: 08:15 AM

The subsequent O/N operation was undersubscribed, in keeping with recent 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.

Read more: First ‘Ultra-Long’ Term Repo Covering Year-End Is Twice Oversubscribed (Cue Alarmists)

As noted last week, this isn’t anything to get overly worked up over – at least not for now. “No one disputes that year-end is going to be nervy, but if Armageddon were brewing I’d expect the bidding to be a lot more aggressive”, Bloomberg’s Cameron Crise wrote, after Monday’s 42-day operation.

The “nervy” year-end bit was underscored last week by BofA’s Mark Cabana, whose name has come up quite a bit since the September funding squeeze.

“The most recent signs of USD funding pressures are driven by (1) a lack of permanent reserves in the banking system and (2) regulatory rules that constrain dealer market making at year-end”, he reminded clients, in a November 26 note, adding that “the pressure comes in the broader context of too much Treasury supply versus cash available to finance it”.

(BofA)

Generally speaking, he’s confident the Fed will avert a disaster over year-end and will ultimately “fix” the problem, but the demand for the term repos suggests bill purchases may have to be upsized.

“These actions can complicate dealer balance sheet management and will likely end up pushing MMF repo lending into FICC sponsorship”, Cabana said last week, following news that the second 42-day repo (i.e., Monday’s operation) would be boosted. “If longer-dated Fed repos complicate dealer balance sheet management too much, the Fed may need to increase or ‘supersize’ bill purchases ahead of year end”.

Read more: Analyst Who Called The Repo Squeeze Warns On ‘Combustible Cocktail’ Into Year-End