Fed Unveils $365 Billion In Term Repos, Other ‘Bells And Whistles’ To Smooth Year-End

The Fed will conduct $365 billion in term repos from December 16 through late January, the new schedule, released on Thursday afternoon shows.

There’s a $50 billion 32-day operation set for Monday, followed by a series of 13-, 14- and 15-day actions, all earmarked for at least $35 billion. Swap spreads widened on the news.

In addition to the term ops, the new plan includes the usual $120 billion overnight operations set for December 13 through December 30 and January 3 through January 14. There’s also a $75 billion one-day forward repo (on December 30) and $150 billion O/N operations set for December 31 through January 2.

During his post-FOMC press conference on Wednesday, Jerome Powell indicated the Fed would do what’s necessary to ensure things don’t spiral out of control over year-end, as they did in September.

He assessed that the bill purchases (which remain unchanged at $60 billion/month in the new plan) and repos are working and did not appear concerned that any year-end pressure would be as acute as some critics have recently suggested.

Ahead of the new schedule, Wrightson ICAP’s Lou Crandall said he didn’t expect any “major changes”, but suggested there may be “some extra bells and whistles [to] provide a safety valve” for the year-end turn. Generally speaking, that looks like what we got.

“We should have a test run on Monday and Tuesday”, SocGen’s Stephen Gallagher reminds you. “In mid-December, like mid-September, large corporate tax payments and the settlement of Treasury’s recent 3-, 10- and 30- coupon offerings should result in a $100 billion plus increase in Treasury cash balances, and therefore a drain of liquidity from the private markets”.

(SocGen)

Some are still skeptical of Powell’s lackadaisical approach to the issue. “His insistence that reserves were correctly sized… is not a good look when repo headlines will argue otherwise the next three weeks”, First Horizon Bank’s Jim Vogel said in a note, adding that the longer the Fed “tinkers with bill purchases and repo, the harder it will be for Treasury to make debt management decisions on a timely basis in 2020″.