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Fed to launch longer-term reverse repos test in December

By Richard Leong

By Richard Leong

NEW YORK (Reuters) - The U.S. Federal Reserve said on Wednesday it will begin testing of longer-term fixed-rate reverse repurchase agreements in December to observe how they might be a tool to help control the federal funds rate, which the central bank targets.

Cash investors including money market mutual funds have been concerned about the lack of availability of Treasury bills and other ultra short-dated debt at year-end, when there is typically a huge demand for almost risk-free investments, analysts said.

The Fed said in a statement on the New York Fed website that it would start offering term repos at various times in December to see how they might be a tool "when there are significant and transitory shifts in money market activity."

"It will help alleviate some of the supply pressure at year-end but it might also create a frenzy to chase after these assets," Sean Simko, head of fixed-income management at SEI Investments Co. in Oaks, Pennsylvania.

The U.S. central bank has ramped up testing of the fixed-rate reverse repo program in which the Fed exchanges its Treasuries holdings and interest for cash from banks, money market funds and mortgage finance agencies.

This program is seen as one of the tools the Fed could use to drain cash from the banking system in an attempt to control short-term interest rates when it decides to tighten monetary policy.

The Fed adopted a near zero interest rate policy in December 2008 at the height of the global financial crisis.

The term reverse repos operations will be mature on or about Jan. 2, 2015 with a $300 billion limit in each operation, the Fed said.

It said it will release more details about the term reverse repos by early December.

Meanwhile, the Fed will tinker with interest rate levels on the overnight reverse repos it will offer through the end of the year.

It will offer 5 basis points on reverse repos on Thursday and Friday; 3 basis points from Nov. 13 to Nov. 14; 7 basis points from Nov. 17 to Nov. 28; 10 basis points from Dec. 1 to Dec. 12 and 5 basis points on Dec. 15 and after.

On Wednesday, the Fed awarded $134.69 billion in overnight reverse repos to 40 bidders, paying them an interest rate of 5 basis points.

(Reporting by Richard Leong; Editing by Diane Craft, Paul Simao and David Gregorio)