U.S. repo markets & the ‘Inverted Supply’ response of the Fed’s Foreign Repo Pool

After more than a decade without appearing in major news headlines, U.S. repo markets did their best last week to catch up and highlight what may happen in money markets in an environment of lesser reserve abundance than previously.

The general story has been told extensively in other places and the deeper final causes are yet to be established. In brief, U.S. Treasury repo rates began climbing broadly last Monday, before spiking notably on Tuesday to, in some segments, levels not seen for decades. Spillovers extended into adjacent markets, the Effective Federal Funds Rate traded far above IOER and its policy band, highly rated overnight financial Commercial Paper rates increased by 25 bps, while its less liquid companions in the non-financial and asset-backed realm increased by more than 200 bps at their peak.

Although slow to heed calls for a standing repo facility to address potential bottlenecks to date, the NY Fed was, after initial technical difficulties, in markets, offering up to USD 75bn in an overnight repurchase agreement operation with primary dealers. USD 53bn was pulled on Tuesday, and the full amounts offered of USD 75bn for the remainder of the week, in repeats of Tuesday’s operation.

As a result, temporary stress in repo (and adjacent) markets has receded, while the NY Fed upped its schedule of liquidity provisions by announcing it “will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, until Thursday, October 10, 2019” and “will offer three 14-day term repo operations for an aggregate amount of at least $30 billion each” this week.

Coincidentally, the size of to date conducted overnight repos of USD 75bn almost mirrors the increase in the Federal Reserve’s foreign repo pool since the start of the year. Since a series on said pool was published three years ago in these pages, it seems an opportune moment to update developments surrounding it and its, at minimum indirect, effects on the repo stress last week.

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U.S. repo markets & the ‘Inverted Supply’ response of the Fed’s Foreign Repo Pool