Fed – Repo over year-end still elevated, plumbing needs overall -IFR news

Continued worries about year end
Dec 10 2019 08:48 by Divyang Shah
The Fed has now conducted three term repo operations that inject liquidity over the turn of the year and all three operations have been oversubscribed. This Thursday (Dec 12) we will get an updated schedule from the FRBNY that will likely look to address still excess demand for year-end related funding. Markets, however, continue to worry that the repo turmoil of September 17 will once again be repeated at the turn of the year with year-end funding actually climbing last week. Funding rates over the turn had been trading around 3.00/3.50% but started to climb last week to 4.00% and yesterday our team in NY said that not only were bid/ask spread widening but year-end GC was quoted 4.50% to 3.90%. There will be a lot of attention next week when large corporate tax payments will once again coincide with Treasury settlement on December 16. A repeat of September is not expected. What would help alleviate market concerns is if the term repo operations, as they start to envelope the turn, were no longer oversubscribed. There are some that worry that what the Fed is doing might not be enough to alleviate year-end funding strains. Market attention has been on the latest musings from Zoltan Pozsar, described as a financial-plumbing specialist, who thinks that the Fed’s liquidity operations have not been sufficient to relax the constraints banks will face in the year-end turn. Pozsar suggests that funding stress could see the Fed doing QE4 by year-end by being forced to shift from buying bills to buying coupons. It’s something that we touched on back in Oct (see “COMMENT: Fed – Testing, testing…testing not-QE”; Oct 21 nL5N2764RO) when we said “The Fed might need to buy short-coupons along with T-bills and even the potential for purchases in maturities beyond 12-months. The problem clearly that this would significantly dilute existing not-QE communication into being more akin to traditional QE. It’s a road the Fed will not want to walk down without exhausting other levers including further rate cuts and continuing with POMO/TOMO combination for longer.” Clearly the Fed has thrown a lot at the problem since September with repo operations totalling over $200bn and non-QE of over $100bn but markets and some commentators remain unconvinced. This is a real test for the Fed and the developments are worth keeping an eye on even if there is the temptation to switch off and think about shopping/presents. /kl Link to settlement dates https://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/auctions.pdf (Reporting by Divyang Shah) ((divyang.shah@thomsonreuters.com;))

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