Thread: The Federal Reserve and the REPO market

joyful_noise - 10/17/2019 at 01:09 AM

The Federal Reserve will be continuing its overnight funding operations through at least January and will start buying Treasury bills next week through the second quarter of 2020, the central bank announced Friday.

The T-bill purchases will be large — $60 billion in the first month despite Fed officials’ insistence that the operation will be an “organic” move to grow the central bank’s balance sheet and the level of bank reserves, as well as to keep the benchmark funds rate within its targeted range. The purchases will involve maturities of between five and 52 weeks.

Following a disruption in short-term lending markets in mid-September that sent interest rates soaring, the Fed began conducting its own operations to provide financial institutions with cash in exchange for ultra-safe assets like government bonds.

Most recently, the Fed said the repo operation would end Nov. 4.

The announcement comes as Chairman Jerome Powell also said that the Fed will be expanding the size of its $4 trillion balance sheet through further short-term T-bill purchases.

[Edited on 11/22/2019 by joyful_noise]

joyful_noise - 10/22/2019 at 09:21 AM

Dimon says money-market turmoil last month risks morphing into a crisis if Fed falters

Published: Oct 18, 2019 5:03 p.m. ET

‘They’re quite bright,’ JPMorgan CEO says of regulators’ ability to work out repo problems

Bloomberg News

JPMorgan Chase & Co CEO Jamie Dimon said Friday that the turmoil in the plumbing of the financial system last month may be precursor of a bigger crisis if the Federal Reserve doesn’t learn from the experience.

During a moderated discussion at the Institute for International Finance meeting in Washington, Dimon said problems in money markets, a crucial source of funding for Wall Street, was exacerbated due to regulations that currently tie up bank’s extra cash parked at the Fed.

As a result, Dimon said his firm, and other major money-center lenders, couldn’t step in and sop up Treasury debt, in the so-called repo market at a key period. That lack of liquidity in the repo market resulted in short-term rates spiking by at least 10% in September, even though banks like JPMorgan were able and willing to step in to relieve the pressure in the system and lower key lending rates.

JPMorgan JPM, +2.48% has $120 billion parked at the Fed now, Dimon said. The balance regularly goes down to $60 billion, but not much below that level because of regulatory rules.

“We might have made the wrong interpretation [of the rules], it is possible. But I think we all were approximately at the same place on this,” he said.

Dimon says the same issue is lurking in the broader market. He said he thinks the total liquidity in the financial system is $4 trillion, referring to assets that banks hold at the Fed, repo auctions and Treasurys, among other assets. The repo market is the market where investors, including hedge funds and other institutional investors, manage leveraged positions borrow.

‘We’ve spoken to the regulators and I think they’re quite bright and they’ll look at this. And they should do it before the crisis happens—because it will happen.’

On a conference call to discuss its third-quarter results last week, Dimon made similar comments about regulatory restraints, saying that rules in place restricted the behemoth money-center lender from providing short-term funding to the broader market.

“What happened in the repo market is kind of instructive,” he said at Friday’s event. “The same issue will happen eventually in what I call the big liquidity thing, the $4 trillion,” he added.

“If you’re locked up on the ability [to intermediate] because of a multitude of regulations, that might cause more consternation in the market, which you don’t want,” he said.

“Banks hit that limit [in the repo market] and couldn’t deploy liquidity. The same issue will happen eventually in the big liquidity thing - the $4 trillion,” when markets become volatile, he said.

“We’ve spoken to the regulators and I think they’re quite bright and they’ll look at this. And they should do it before the crisis happens—because it will happen,” Dimon said.

In addition to daily liquidity auctions, where the Fed purchases Treasury debt, the central bank recently said it would provide emergency liquidity by buying some $60 billion of Treasury bills a month, expanding its balance sheet.

joyful_noise - 10/23/2019 at 01:07 AM

Worries grow over the Fed’s efforts to fix funding issues: ‘This is all likely to get much worse’. to-fix-funding-issues.html

Federal Reserve officials have been working feverishly to address issues that popped up more than a month ago in the overnight bank lending market. The central bank last week started a new bond-buying program that is expected to grow its balance sheet by $60 billion a month to start. J.P. Morgan Chase analysts, among others, worry that recent additional hiccups in overnight lending are symptoms of bigger problems that will grow worse as the year comes to a close.

Wall Street is getting worried that the Federal Reserve’s aggressive efforts to control short-term borrowing rates have run into some potholes, with more danger ahead.

The central bank has been working feverishly to address issues that popped up more than a month ago in the repo market, the overnight lending place where banks go to borrow money from each other. A cash crunch led to a spike in several rates, leading the Fed to institute programs to maintain proper liquidity levels.

While the effort has worked fairly well so far — rates rose last week, though not nearly as much as in mid-September — finance professionals fear that the market problems are not fixed and funding issues can happen again.

Pimco founder Bill Gross on the U.S. economy and Fed policy

“The repo market has been drugged into submission by the Fed,” said Jim Bianco, head of Bianco Research. “That’s fine for a while. But what I am getting concerned about is that they’re not figuring a way to get it off the drug and get it back to normal, and that will be a problem longer term for them.”

Investors have long complained about the Fed hand-holding the market, injecting trillions of dollars in liquidity and keeping interest rates artificially low during and after the financial crisis.

This is a different situation, though.

Rather than looking to goose the economy back to health, the Fed is now using its balance sheet to make sure banks have enough reserves and an adequate amount of capital is flowing through the system to keep things running efficiently. The effort also is aimed at keeping the Fed’s own overnight funds rate within the 25 basis point target range it employs.

Likely ‘to get worse ... before it gets better’

To do so, the central bank earlier this month announced a new bond-buying program that initially will target about $60 billion a month of short-term Treasury bills. The program began last week with about $20 billion worth of purchases.

As the balance sheet expansion kicked off, the funds rate pushed to the upper end of its target range, hitting 1.9% for a few days, or 10 basis points above the interest on excess bank reserves, which is supposed to serve as a guardrail for the funds rate. The repo rate similarly rose, eclipsing 2% at one point.

Market pros worry that a confluence of factors will make the Fed’s market balancing act difficult.

Bianco insists that the Fed is not being discerning enough about credit quality in providing cash in exchange for collateral; others are concerned with what happens as the year draws to a close and banks are more focused on shoring up their liquidity mandates than keeping cash flowing in the overnight markets.

“With year-end coming up, this is all likely to get much worse, in our view, before it gets better,” J.P. Morgan Chase fixed income analysts led by Joshua Younger said in a note.

Younger pointed to last week’s rate bump as indications that all is not settled in the repo markets.

The Fed has said that large settlements of Treasury auctions were at the root of September’s disturbance — along with payment of corporate income taxes — that sapped money out of the system. But Younger said such events, rather than serving as excuses, “look much more like warnings.”

“Given the benefits of our newfound perspective, we recommend viewing these moves as highlighting the limitations of the Fed’s chosen solution to their operational issues,” he wrote.

In addition to buying T-bills, the Fed has been conducting a series of temporary operations to keep the overnight markets humming.

The balance sheet is ‘a much bigger deal’

At the heart of the issue is how much bank cash, or reserves, the Fed should be holding. The central bank had cut the reserves level by more than $600 billion by allowing a capped level of maturing bond proceeds to roll off each month. However, the operation, nicknamed “quantitative tightening,” seemed to go too far, shaking confidence in whether the Fed indeed was operating in an “ample reserves” regime.

Bianco said one way the Fed can help the market is by showing it is taking the reserves situation seriously.

Former Fed Chair Janet Yellen, who presided when the balance sheet reduction operation began in October 2017, remarked that the process would “run in the background” and be “like watching paint dry,” remarks that are now widely derided in the finance community. Similarly, current Chairman Jerome Powell said in December that the process was on “autopilot,” another characterization that rankled markets as it signaled more tightening to come.

“We’re learning it’s a much bigger deal that what the Federal Reserve stated it was,” Bianco said. “They should acknowledge that movements in their balance sheet matter a lot more than they say.”

In that light, Bianco said the Fed should probe deeper into whether its own liquidity and capital requirements for banks are gumming up the lending portals. Fed officials so far have mentioned regulations in passing but have not made a commitment to review the rules.

For their part, Fed officials have been stressing a couple of points: that the measures taken during September’s repo market stress have worked, and that investors should not confuse the current balance sheet expansion with the quantitative easing measures taken to address the crisis.

“Our open market operations have succeeded at keeping the federal funds rate within the target range and have stabilized conditions in short-term funding markets,” New York Fed President John Williams said in a speech Friday. “At the same time, recent experience has provided important lessons for the successful operation of the ample reserves framework.”

Williams added that the Fed will continue to monitor the reserves situation “and may adjust the specifics of the plan as appropriate.”

Still, others on Wall Street, including Goldman Sachs and Bank of America Merrill Lynch, have warned about possible disruptions in the overnight funding markets, though BofAML said the year-end issues could be classified as “typical.”

The balance sheet expansion “represents a necessary step that serves to fix the reserve hole the Fed dug itself into by continuing QT for too long, should firmly place the Fed back into an ‘abundant reserve regime,’ and represents a rapid shift away from repo operations to permanent balance sheet growth,’” wrote Athanasios Vamvakidis, a forex strategist at BofAML.

joyful_noise - 10/24/2019 at 09:17 AM

The Fed is sharply increasing the amount of help it is providing to the financial system
PUBLISHED WED, OCT 23 20193:43

The Federal Reserve is ramping up the amount of temporary liquidity injections it is providing for overnight lending markets.

Starting Thursday, the repo operation offerings will escalate to $120 billion from the current $75 billion as the central bank continues to calibrate the right amount of funding needed to keep the markets operating properly and to hold the overnight funds rate within its target range.

The announcement came from the New York Fed, which did not elaborate on the reason for the increase. However, it comes a day after the Fed injected just shy of $100 billion into the system via an operation where it provides banks with cash in exchange for high-quality assets like government bonds.

“It’s just more evidence the Fed will not back off as year-end gets closer,” said Mike Schumacher, global head of rate strategy at Wells Fargo Securities. “The Fed wants to take out more insurance. You had repo pick up last week. That might not have gone over too well.”

A mid-September cash crunch in the repo, or repurchase, market led the Fed to conduct a series of repo and term repo operations to make sure that banks have the overnight funding they need at rates within the central bank’s intended parameters.

Funding constraints caused the repo rate to jump to as high as 10% from around 2%, while the funds rate briefly rose 5 basis points above its target range.

In addition to the repo increase, term repo operations are rising to $45 billion, from $35 billion. In addition to those two operations, the Fed recently announced a permanent operation that will target $60 billion a month initially in bond purchases that will resemble the three rounds of quantitative easing employed during and after the financial crisis.

However, the Fed now is addressing the proper amount of bank reserves in the system rather than looking to juice up the economy, as was done during QE.

joyful_noise - 11/22/2019 at 06:55 AM

Fed Adds $103.65 Billion to Financial System
Fed takes all the securities offered to it by eligible banks; interventions are aimed at ensuring the financial system has enough liquidity

Updated Nov. 21, 2019 4:44 pm ET
The Federal Reserve Bank of New York added $103.65 billion in temporary liquidity to the financial system on Thursday.

The intervention came via overnight repurchase agreements, or repos, that totaled $74.45 billion, and via 14-day repos totaling $29.2 billion. The Fed took all the securities offered to it by eligible banks.

One option that received considerable discussion was a so-called standing repo facility – essentially a mechanism where the Fed will step in whenever needed to supply banks with reserves in exchange for ultra-safe collateral like Treasury debt.

Pros and cons of standing repo

The standing repo idea is a popular one on Wall Street. But policymakers said they are not yet ready to make any decisions, instead deciding to continue to watch how market operations instituted since the September problems are working.

A standing repo “would likely provide substantial assurance of control over the federal funds rate, but use of the facility could become stigmatized, particularly if the rate was set at a relatively high level,” minutes from the October meeting stated.

“And by effectively standing ready to provide a form of liquidity on an as-needed basis, such a facility could increase the risk that some institutions may take on an undesirably high amount of liquidity risk,” the minutes said.

In addition to the standing repo, officials discussed “modestly sized, relatively frequent repo” operations that nonetheless would not be permanent.

There’s been some debate about how to see the operations the Fed has instituted to handle the repo issues, which were attributed to a high degree of Treasury auction settlements and corporate tax payments that drained liquidity from the system.

Fed officials have repeatedly emphasized that the efforts to expand the balance sheet, with the aim of increasing bank reserves, is not akin to the quantitative easing program used to stimulate the economy during and after the financial crisis.

However, markets have treated it to some extent as a “QE4” type of operation.

The balance sheet has expanded about 7.4% since the repo issues to near $4.1 trillion, while the S&P 500 has gained about 4.5%. Bank reserves, meanwhile, have grown little – just $11.6 billion since Sept. 11, or less than 1%.

Fed officials said they will continue to examine the issue.

Members “commented on the need to carefully evaluate these design choices to guard against the potential for moral hazard, stigma, disintermediation risk, or excessive volatility in the Federal Reserve’s balance sheet,” the minutes said.

[Edited on 11/22/2019 by joyful_noise]

pops42 - 11/22/2019 at 07:42 AM

joyful_noise - 12/19/2019 at 03:55 AM

Liquidity is about to tighten up again, things could get interesting in the Repo Markets in the coming days ...

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