Late last week, some rates strategists described a series of oversubscribed repos as the “canary in the coal mine” that could presage a buildup of dollar-funding pressures amid a worsening macro outlook.
Just prior to the Fed’s emergency rate cut last Tuesday, both the scheduled term repo and that day’s overnight operation were oversubscribed. It was the first oversubscribed O/N op since October.
The next day’s O/N op was oversubscribed too, and both term ops last week were three times oversubscribed.
On Saturday, I gently noted that “one thing seems certain”: The Fed will be reluctant to trim the size of its repos when the next schedule is released.
Fast forward to Monday morning, and the New York Fed went ahead and upsized the repos. The overnight ops will now be “at least” $150 billion through March 12 (starting today) and both the March 10 and March 12 term ops will be raised to “at least” $45 billion from $20 billion.
At the 8:30 ET O/N operation, the Fed took $112.932 billion of securities, which, on a simple read, means this op would have been oversubscribed were it not for the decision to upsize it minutes previous.
“These adjustments are intended to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation”, the Fed said, adding that “they should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus”.
This comes amid myriad signs of dollar funding pressure, which, despite attempts to downplay the situation, just “is what it is”, so to speak. And even if the proximate cause of the market’s issues right now has nothing to do with the plumbing, that could change depending on the evolution of the containment measures around COVID-19 and how those measures affect firms and their ability to finance themselves.
In any event, this is the first of what could be a series of mini-interventions this week aimed at preventing a full-scale meltdown across markets.
Read more: Dollar-Funding Stress Could Be ‘Crossing The Rubicon’ Moment For Market
Bear in mind (no pun intended) that as stocks plunge and credit spreads widen, the precipitous drop in long-end yields won’t be enough to offset the tightening impulse on financial conditions. If anything, free-falling long-end yields are a bright, red warning light at this juncture.
Full statement
The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has updated the current monthly schedule of repurchase agreement (repo) operations.
Beginning with today’s operation and through March 12, 2020, the Desk will increase the amount offered in daily overnight repo operations from at least $100 billion to at least $150 billion. In addition, the Desk will increase the amount offered in the two-week term repo operations on Tuesday, March 10, 2020 and Thursday, March 12, 2020 from at least $20 billion to at least $45 billion.
Consistent with the FOMC directive to the Desk, these adjustments are intended to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation. They should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus. The Desk will continue to adjust repo operations as needed to foster efficient and effective policy implementation consistent with the FOMC directive.
Detailed information on the schedule and parameters of term and overnight repo operations are provided on the Repurchase Agreement Operational Details page. The Desk will release the next monthly repo operation schedule for the March 13, 2020 to April 13, 2020 period on Thursday, March 12, 2020 around 3:00 PM ET.
Since Fed Funds cuts are soon to lose their effectiveness, such as it is. Fed is not ready to go below ZLB. If Fed can only buy Treasuries and agencies, QE will also lose effectiveness. Fed is not ready for negative rates. So only Fed tool is liquidity provision, repos will be upsized further.
I lost track of the helicopter $ discussion, but my impression was that has to be done by Treasury. Not sure administration is ready for that.
So this is what the strongest economy ever looks like. Good to know.