The Federal Reserve expanded its intervention in short-term borrowing markets on Wednesday for the second time this week, announcing larger and longer-term lending facilities as concern about coronavirus disruption continued to mount.
The New York arm of the central bank said it will increase the size of its operations in the repo market, where investors exchange high quality collateral such as Treasuries for cash.
The NY Fed will now provide at least $175bn in daily overnight loans, up from $150bn offered earlier in the week and $100bn previously, beginning on Thursday and running until April 13. It will also provide at least $45bn in two-week loans, twice a week, over the same period.
And in a new addition to its toolkit, it said it would start issuing up to $50bn of one-month loans on three occasions beginning on Thursday.
“They brought out the bazooka,” said Gennadiy Goldberg, a rates strategist at TD Securities. “There is currently no crisis yet, but funding markets are a little tenuous given all the market volatility.”
The coronavirus outbreak has prompted the Fed to reverse its previous plans to gradually withdraw from the short-term borrowing market, where it has been intervening since a cash crunch in September.
According to calculations by Mr Goldberg, by March 23 the Fed will have pumped in more than half a trillion dollars into the financial system.
The $505bn on offer from the Fed at that point will surpass the $490bn originally offered by the central bank over the year-end period, when it was working to prevent problems at a time when cash is typically in short supply.
US stocks have gyrated wildly alongside other risk assets in recent days. Repo rates have trended higher at the same time, with the overnight rate climbing to 1.28 per cent from below 1.20 per cent shortly after the Fed levied an emergency rate cut last week.
One measure of banking-sector risk — the FRA-OIS spread — now hovers near its highest level in more than eight years. The spread, the difference between the interbank lending rate and the risk-free rate set by central banks, spiked to more than 50 basis points this week from roughly 12bp at the end of last month, surpassing the roughly 45bp level seen when funding markets seized up in September.
Meanwhile, demand for the central bank’s cash has remained high. On Wednesday market participants submitted $132.4bn in bids for overnight loans from the Fed, following $123.6bn requested on Tuesday. That was well-below the $150bn limit, but a marked increase from just a few weeks ago.
“They want to bring as much firepower as they can to this fight,” said John McColley, a portfolio manager for liquidity strategies portfolios at Columbia Threadneedle Investments. “They don’t want to do things in small steps.”