New York Fed extends market intervention into November
The Federal Reserve Bank of New York will extend its intervention in the repo market into November, it said on Friday, soothing concerns about a re-emergence of the cash crunch that sent short-term interest rates soaring in September.
The New York Fed first stepped into the repo market, where banks and investors borrow cash in exchange for Treasuries and other high-quality collateral, after the cost of borrowing money overnight quadrupled to 10 per cent last month.
It intensified its efforts heading into the end of September to ward off potential strain at the end of the third quarter, when banks typically step back from the market.
The markets arm of the US central bank announced that it would continue to inject $75bn in overnight loans into the repo market every day through to November 4. In addition, it would conduct a series of term-repo operations — loans ranging from six to 15 days — to maintain an additional $140bn in the market until early November.
The announcement has helped ease traders’ concerns of a potential shortage of cash re-emerging when close to $140bn in existing two-week term repo loans rolls off next week.
“The New York Fed has $139bn in term operations coming off. Now they want to replace that,” said Scott Skyrm, a repo trader at Curvature Securities. “Rates would otherwise have gone up.”
Strategists and investors have called on the Fed to find a permanent fix to the short-term funding pressures that bubbled up in September, favouring asset purchases as the best way to avoid another flare-up around year-end.
At the Fed’s September meeting, which fell shortly after the eruption in repo rates, chairman Jay Powell brought up asset purchases as a possible solution. He said the Federal Open Market Committee would be taking up the subject at its next meeting at the end of October. The new operations announced by the New York Fed will tide the repo market over until then.
According to Subadra Rajappa, the head of US rates strategy at Société Générale, the Fed may need to purchase as much as $200bn in Treasuries to increase the amount of cash in the financial system to a level high enough for funding markets to operate without daily intervention in the future.
She added that the central bank would be able to keep a lid on rates with these temporary operations, but “the question is if they want to be that actively involved day-to-day in the market”.