(Bloomberg) -- Primary dealers piled into the Federal Reserve’s repo operations Tuesday, signaling demand for cash heading into the end of the third quarter.
The New York Fed held a 14-day term repurchase-agreement operation followed by an overnight action, with both coming in oversubscribed. The measures are part of a plan the central bank announced last week after a tumultuous few days in which a liquidity crunch caused funding costs to spike to record levels.
While the term repo operation was oversubscribed, the rates at which bids were submitted and accepted suggested to some observers that the need for funding isn’t necessarily acute. Despite elevated demand, there was “no sign of a scramble” on Tuesday, Brean Capital’s Russ Certo said.
“Basically, those dealers were saying that if the Fed really wants to give them bargain funding, they’ll take it,” said Wrightson ICAP’s Lou Crandall. “But they don’t absolutely need it.”
In the first of this week’s three 14-day term repurchase-agreement operations by the New York Fed, dealers submitted $62 billion of securities, more than the $30 billion offered by the central bank.
In a second action, the N.Y. Fed took $75 billion of securities in an overnight repo operation -- the maximum amount -- with dealers submitting about $80 billion of assets.
The bank’s measures came as overnight general collateral repo rates climbed anew Tuesday morning after trading back within the Fed’s target range late last week. The rate traded as high as 2.07% before falling to around 1.83%, on pace to settle below 2% for a fourth straight day, according to ICAP data.
Further term repo actions are planned for Thursday and Friday, while overnight operations are set to take place every day through Oct. 10.
The market is also looking to this week’s Treasury note and bill auctions for a gauge of dealer confidence in funding markets. Tuesday’s $40 billion two-year auction drew a lower yield than the prevailing rate at the bidding deadline, a sign of demand. An additional slate of more than $90 billion of notes and bills will follow this week.
Amid volatility in the repo market last week, Thursday’s bill auctions met a poor reception, suggesting skepticism that the Fed’s actions to that point were sufficient to quell the funding crunch.
Going into this afternoon’s note auction, analysts appeared to be less concerned. For one thing, the backdrop for buying debt is supportive, amid uncertainty surrounding U.K. Prime Minister Boris Johnson and Brexit, and some worrisome German economic data.
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