The repo market has calmed down, but the Federal Reserve is gearing up its safeguards seemingly to prevent turmoil from resurfacing on Monday.
Last week’s craziness was not the first time in recent memory that U.S. money markets have shown signs of stress. It’s tended to happen around quarter-end, most notably in late December.
The third quarter ends Monday. So, for the past two days, the New York Fed has run $100 billion overnight repo operations -- bigger than the $75 billion daily liquidity injections that began early last week -- plus separate 14-day operations. Neither of Friday’s actions were fully subscribed and short-term lending rates are well below the peak seen last week, a sign order has been restored for now.
But on Monday, that larger $100 billion size will be repeated and the overnight operation will run from 7:45 a.m. to 8 a.m. New York time, earlier than prior morning actions. Both signal the Fed is getting ready in case rates spike again.
“I wouldn’t be surprised to see some volatility,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “The Fed has provided enough liquidity for now, but there are some large Treasury settlements so you’ll have large pressures.”
She was referring to the fact that two-, five- and seven-year Treasuries that were auctioned this week by the U.S. government are settling -- or being issued -- on Monday. That will push collateral into the market at a time when investors are still clamoring for cash, potentially getting the repo market’s supply and demand out of whack again.
Trading in repurchase agreements suggests rates are coming down. The overnight rate for quarter-end is being quoted at approximately 2.85%, down from about 3.25% around 9 a.m. Friday, according to traders familiar with the transactions who asked to not be identified because they are not authorized to speak publicly. But that’s far above the current level of around 1.88%, according to ICAP data.
The overnight repo rate soared to a record high of 10% last week amid a funding crunch that drew scrutiny to the size of the Fed’s balance sheet and fueled calls for the central bank to start injecting liquidity.
The central bank responded to the funding pressures, which appeared to be building around quarter-end, with three term operations this week and a daily schedule of overnight actions through Oct. 10.
As of now, it appears that the New York Fed “was able to satiate primary dealer demand for term funding at these rate levels,” Jon Hill, a strategist at BMO Capital Markets, wrote in a note. “The question then becomes how much of the reserve infusion will be able to permeate through markets and reach other participants.”
He said that while there may still be upward pressure on short-term rates on Monday, it may be more muted than some fear.
