fed Markets

Make It 3 Out Of 3 On Oversubscribed Repos Covering Year-End Turn

One almost gets the sense that people will be disappointed if there aren't any fireworks.

Three out of three.

The third term repo covering year-end was nearly two times oversubscribed on Monday, as the New York Fed got $43 billion in bids for the $25 billion on offer in the 28-day operation.

Heightened demand for liquidity over year-end had already showed up in a pair of oversubscribed 42-day actions (here and here) as analysts continue to warn about the distinct possibility that a “combustible cocktail” of reserve shortage and dealer intermediation constraints (related to GSIB) will catalyze another squeeze.

Deal Date: Monday, December 09, 2019
Delivery Date: Monday, December 09, 2019
Maturity Date: Monday, January 06, 2020
Type of Operation: Repo
Auction Method: Multiple Price
Settlement: Same Day
Term of Operation – Calendar Days : 28 Days
Term of Operation – Business Days : 18 Days
Operation Close Time: 08:15 AM

Results Amount ($B) Rate (%)
Collateral Type   Submitted Accepted Stop-Out1 Weighted
High Low
Treasury 29.800 17.705 1.60 1.612 1.67 1.56
Agency .100 .100 1.64 1.640 1.64 1.64
Mortgage-backed 13.100 7.195 1.62 1.649 1.68 1.56
Total 43.000 25.000

As usual, the subsequent O/N operation was undersubscribed.

Over the weekend, as part of their quarterly review, the BIS examined the causes of September’s chaos and determined that the corporate tax date and coupon settlements don’t fully explain things.

In other words, structural factors are impairing the market and need to be addressed.

To be sure, there’s some cause for concern. Despite the Fed’s ongoing bill purchases (from mid-October), the total amount of repo outstanding still sits above $200 billion. In addition to the year-end GSIB snapshot, analysts fret that calendar events have the potential to exacerbate problems.

“December is typically the heaviest corporate tax payment month of the year, with nearly 25% of all annual corporate tax revenues collected during the month”, TD wrote, in a recent note, adding that “these payments are due mid-month and are therefore concentrated over several days”.


The visual also shows Treasury’s cash balance has tended to rise in December over the past several years. Here’s a bit more from TD that gets into the specific dates:

Corporations paid $37bn during just two mid-month days in December 2018 and $54bn of payments in December 2017. Such large outflows from the banking system to the TGA rapidly pull cash out of the system and decrease reserves. This December the bulk of these payments is likely to occur on December 16. Treasury coupon settlements: With the 3y, 10y, and 30y auctions all settling on December 16, there will be an additional $54bn of cash leaving the system on settlement day. At year-end there will be an additional $48bn of cash leaving the system as the 2y, 5y, 7y, and 2y FRN auctions settle. Similar to tax payments, these flows pull money out of the banking system and lower the level of reserve.

That said, it’s worth noting that while analyst after analyst has warned that another bout of stress is almost guaranteed, the consensus (generally speaking, anyway) is that because everyone (including and especially the Fed) expects it, it likely won’t be as acute.

“While year-end balance sheet pressures are indeed real and there are plenty of parallels to prior years, this year could be different” due to the repos and because reserves are no longer shrinking, TD went on to say, in the same note.

One almost gets the sense that people will be disappointed if there aren’t any fireworks.

Read more: The BIS Explains ‘Highly Unusual’ September Repo Chaos

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