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Fed Injects Cash for Fourth Day as Funding Markets Stabilize

Alexandra Harris and Liz Capo McCormick
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Fed Injects Cash for Fourth Day as Funding Markets Stabilize

(Bloomberg) -- The Federal Reserve added liquidity for a fourth straight day to a vital corner of the funding markets, helping further stabilize rates as investors remain concerned that fresh bouts of stress may be felt in the weeks ahead.

The New York Fed injected another $75 billion Friday through an overnight repo operation. That followed operations of the same size on Wednesday and Thursday, and $53.2 billion on Tuesday, with each of these prior agreements rolling off the morning after they’re completed.

The actions, commonplace in pre-financial crisis times, temporarily add cash, with the Fed taking government securities as collateral. Wall Street bond dealers submitted about $75.6 billion of securities for Friday’s Fed action, lower than the previous two days’ levels. Many analysts are already predicting the Fed will do a similar operation on Monday.

“Given it was slightly oversubscribed and the rate was at 1.8%, its shows the Fed is playing an important role in calming the market and needs to keep doing these operations,” said Priya Misra, head of global rates strategy at TD Securities in New York. “But overall, these operations are only a temporary fix, it’s a band aid. The big fear is that around quarter-end, when dealer balance sheets are more constrained that these Fed operations won’t work as well any more.”

The latest addition of liquidity -- with the Fed making clear it’s ready to do more as needed -- follows the Federal Open Market Committee’s move Wednesday to reduce the interest rate on excess reserves, or IOER, by more than their main interest rate -- all attempts to quell money-market stresses.

The operations have calmed the funding market, with repo rates declining to more normal levels after soaring to 10% Tuesday, four times last week’s levels. Overnight general collateral repurchase agreement rates remained steady Friday, trading around 1.9%, according to ICAP.

Fed Vice Chairman Richard Clarida said on Friday the repo market strain isn’t a concern for the economy and that the central bank acted decisively to address the issue. Chairman Jerome Powell said on Wednesday that he was confident the New York Fed’s actions would contain funding problems. Former New York Fed President William Dudley echoed that view in an editorial published Friday.

The Fed effective on Thursday was 1.9% -- within the central bank’s target rate range of 1.75% to 2%. That compares to 2.25% on Wednesday, and 2.3% Tuesday -- when it busted above the top of the Fed’s previous target band, before policy makers lowered borrowing costs on Wednesday.

However, there are signs of investor apprehension about future funding levels, which is manifesting in different ways.

Treasury bill sales on Thursday were met with a poor reception, as investors demanded to be compensated via higher yields for locking up cash. And the rate on two-week repo, which would fund investors through the end of the quarter, is around 2.58%, ICAP data show.

The Fed may conduct term repurchase agreements, with such transactions extending beyond one day, to contain the risk of outsized repo rate movements over the final days of the quarter, said Scott Skyrm, executive vice president at Curvature Securities, a New Jersey-based broker-dealer that focuses on the repo market.

“It’s the right time for the Fed to come in and do a term operation into October, which would pre-fund some cash into the market for quarter-end and take care of some of those liquidity concerns now,” Skyrm said.

Meanwhile, in cross-currency basis -- which shows floating-rate payments in different currencies -- the premium for the Australian dollar over its U.S. counterpart collapsed by the most in eight years during Asian trading hours.

Lou Crandall of Wrightson ICAP said in a note this morning that next week may bring more funding pressures in repo.

“Bill settlements as well as the early liquidity-chilling effects of the approaching quarter-end statement date could start to move repo rates higher,” Crandall wrote.

(Adds comments from Fed’s Clarida.)

To contact the reporters on this story: Alexandra Harris in New York at aharris48@bloomberg.net;Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Debarati Roy, Mark Tannenbaum

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