Fed’s Underused Repo Ops Point to Ample Funding for End of Year

(Bloomberg) -- The Federal Reserve Bank of New York’s operations to inject cash into the financing system over the end of the year were undersubscribed on Monday, an indication that pressures have abated.

Primary dealers submitted less than $19 billion of bids for a $75 billion repurchase-agreement operation that’s set to mature on Jan. 2, and just over $8 billion for a 15-day action that had a maximum possible size of $35 billion. These are the latest in a series of central bank offerings for year-end that have been undersubscribed, suggesting that dealers have ample funding going into the end of 2019.

Such an outcome was far from assured in the wake of turmoil during the third quarter that saw overnight repo rates spike to 10% from around 2% and prompted the Fed to implement these kind of operations to calm markets. It has also been buying Treasury bills to add reserves to the system.

“It seems like the dealers have most of the funding they need for the turn,” said Mark Cabana, head of U.S. interest rates strategy at Bank of America. “Seems the Fed has been victorious.”

Monday’s actions -- including an unusual overnight operation with a one-day delayed settlement -- were announced by the central bank earlier this month and came after Chairman Jerome Powell said that the central bank stands ready to adjust details of its repo operations as appropriate to keep the fed funds rate within the central bank’s target range.

The rate for overnight general collateral repo on Dec. 31 has been quoted at 1.95% Monday, according to TD Securities. While that’s still above the upper bound of the Federal Reserve’s target for the benchmark fed funds rate -- currently 1.75% -- it is notably lower than in recent weeks. The comparable rate for Dec. 31 was at 2.70% on Friday and 3.75% to 4% a few weeks ago, according to TD. The effective fed funds rate, which is what the central bank actually targets, was steady at 1.55% Friday.

The Fed so far has injected roughly $230 billion of liquidity to avoid any potential cash crunch at the end of the year. That’s out of a maximum $340 billion the central bank has already offered for the turn. It will also offer a further $150 billion Tuesday through its final ordinary overnight operation of the year, although these actions -- including the one on Monday that attracted just $30.8 billion of bids -- have also been less than maximum size of late.

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

To contact the editor responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net

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