The Federal Reserve auctioned off another $72 billion of repo agreements on Friday, capping a period of increased fears of limited liquidity in the banking sector.
“The fact that the repos are still ongoing is a bit troubling for me,” Tom Essaye, who publishes investment newsletter The Sevens Report, told Yahoo Finance’s The First Trade. “It makes me think that the Fed somehow or other has misjudged the liquidity needs and maybe how much dollar-related leverage is out there in the market.”
Repurchase agreements, or repos, provide overnight financing to help banks and broker-dealers fund securities on their balance sheets. Although often done in the private market bank-to-bank, the Fed sometimes offers direct repo facilities to some of the nation’s largest banks, including JPMorgan Chase (JPM), Citigroup (C) and Bank of America (BAC) to facilitate the orders. That system creates all sorts of regulatory hurdles that may be holding up transactions, says NatWest Markets Chief U.S. Economist Michelle Girard.
“You’ve got sort of a chokehold in what we call the primary dealer sector, those institutions that are actually trading and facilitating a lot of the borrowing back and forth,” Girard said. “This is not a problem that is going to go away, but it is not a threat – I don’t think – to the overall economy or systemically to the markets like we saw in the financial crisis.”
“This is not a sign of stress like we saw in 2008, where you had institutions unwilling to lend to each other,” Girard said. “You’ve got a lot of reserves in the system. I don’t think this so much a liquidity problem.”
The Fed has been injecting liquidity into the funding markets since Sept. 17, when the rate on overnight general collateral repo jumped to 10%, about four times greater than usual levels.
Essaye says investors need to keep an eye on this, but it’s not likely to signal a bigger crisis.
“Is it a reason to get defensive today? No,” Essaye said. “Is it something we need to pay attention to? Yes.”