Fed’s Year-End Repo Is Underscribed Again, But Outlook Cloudy

(Bloomberg) -- The Federal Reserve Bank of New York’s operation to inject cash into the financial system over the end of the year was undersubscribed on Monday, which could indicate year-end funding pressures have eased.

Primary dealers submitted $28.8 billion in bids for the 15-day term operation, which matures Jan. 7. That was less than the $35 billion on offer.

The central bank is planning to offer a total of $490 billion via repo operations for the turn of the year, including the $156 billion that it has already pumped in through five earlier term actions. While the first four term offerings for year-end were oversubscribed, Monday marks two straight -- after the Dec. 19 action -- that have come in below the maximum amount.

“The dilemma is what’s the reason for the decline,” said Curvature Securities Executive Vice President Scott Skyrm. “Are banks full on their balance sheet so they’re offering less collateral, or are they getting all of their year-end collateral funded so they need less?”

Monday’s result doesn’t guarantee that year-end funding pressures are gone, though. Year-end repo remains elevated at 3.55%-3.75%, according to Skyrm, more than double the overnight rate.

The Fed has been injecting liquidity into the repo market since the Sept. 17 when the overnight rate for general collateral repurchase agreements spiked to 10% from around 2%. It has also been buying Treasury bills to add reserves to the system.

The Fed also conducted an overnight operation Monday with a limit of $120 billion. As with the most recent of these actions, it was undersubscribed, attracting just $20.55 billion of bids. That’s the lowest since the New York Fed started offering overnight repo in September, data show.

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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