Sunday, September 22, 2019

Fed Extends And Expands Repo Liquidity Operations

As I had expected, the Fed announced that their repo facility will continue until at least October 10 and will provide liquidity for 14-day periods too, as well as O/N.

 From the Wall Street Journal:

The New York Fed said on Friday it would continue to offer to add at least $75 billion daily to the financial system through Oct. 10, prolonging its efforts to relieve pressure in money markets.
In addition to at least $75 billion in overnight loans, the Fed said it would also offer three separate 14-day cash loans of at least $30 billion each next week. The Fed will conduct further operations as needed after Oct. 10.

This adds up to at least $465 billion per week.  That's far from peanuts, even if most of it is O/N, i.e. it rolls every day - except for the weekend, of course, when it's longer.

The article quotes a Fed official claiming the current trouble stems from a sticky "distribution process" of liquidity, i.e. that excess reserves may be concentrated among few banks instead of many - something of a liquidity oligopoly (my term). 

Even so, why aren't these banks supplying the repo market with cash as they regularly did until last week?.Are interbank credit lines full, all of a sudden?  Were they scaled back, perhaps?

It is curious that this "stickiness" evolved within just 48 hours and is now considered so serious that the Fed is taking (semi?) permanent action.  Obviously, it expects the stickiness to stick around for a while.  The 14-day money is the key indicator of this, otherwise they would just do a few O/N's and quit.  And note the bit about "further operations as needed after Oct. 10".

Watch closely the 14-day repo demand: if dealers bid for significantly more than $30 billion at a time, it means the market has serious, ongoing liquidity concerns. 

No matter how the Fed is trying to spin this, actions are louder than words - and, quite plainly, their actions indicate that they believe the lack of liquidity to be no passing matter.

 Image result for risk dial

For now, I am going to "stick" to my suspicion that risk is being dialed back by some major market participants, who prefer to keep their cash parked with the Fed instead of supplying it to the repo market. Do they know something we don't? Is there a Black Swan flapping its wings out there?


  1. black swan in January 2020 in case of public debt - sudden state bankruptcy


    1. for a few months starting now till January 2020 is upon us - corrective pro-risk in markets




  4. The above bond funds would be at high risk of closing shop?