Are the Federal Reserve’s injections of billions of dollars into short-term funding markets finally working?
That’s the question percolating on Wall Street as analysts noted market participants did not fully take up the $35 billion of 14-day repurchasing operations offered by the Fed on Thursday morning, as part of an estimated half a trillion dollars that the Fed could pump into short-term funding markets for the year-end period. The Fed’s website shows that $31.3 billion of bids were accepted.
Those taking part in the offerings may need the funds to get through the year-end when regulators take a snapshot of banks’ balance sheets and decide how much additional capital they should carry. To avoid these regulatory surcharges, banks typically curb their lending in repo markets as part of the usual “window dressing” ritual.
See: The repo market is ‘broken’ and Fed injections are not a lasting solution, market pros warn
Scott Skyrm, executive vice president at Curvature Securities, said in a tweet that an under-subscribed term repo operation could indicate that overnight lending rates at the year-end period may not climb to worrisome levels as some feared.
But he hinted that it’s possible to reach another conclusion — banks may no longer have enough capacity on their balance sheets to borrow funds from the Fed’s repo operations. Lending constraints at U.S. banks have been seen as one contributor to the repo market squeeze in mid-September, when the overnight rate surged as high as 10%.
Jon Hill, an interest-rate strategist at BMO Capital Markets, pushed back on that interpretation.
He said primary dealer banks, the market participants who deal directly with the Fed, may be deciding that borrowing through overnight markets between the turn of the year, between Dec. 31 and Jan. 2, is a “more cost effective funding strategy” than borrowing funds through the Fed’s longer-term repos.
Read: Here’s how the stock-market’s record climb could gum up a key source of liquidity on Wall Street
The Federal Reserve has insisted volatility in money market rates at year-end is likely to stay muted thanks to its actions. New York Fed President John Williams said “we are in a very good position in terms of providing liquidity, providing reserves to the system” on Wednesday.
In markets, the 10-year Treasury note yield TMUBMUSD10Y, -0.32% hung around 1.92%, based on Tradeweb data on Thursday morning. The S&P 500 SPX, +0.34% , the Nasdaq Composite COMP, +0.49% and the Dow Jones Industrial Average index DJIA, +0.46% all set new intraday records on Thursday.
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