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Fed to Keep Pumping Liquidity Into Repo Market Through October

Alexandra Harris

(Bloomberg) -- The Federal Reserve announced that it will extend through October the ad hoc liquidity lifeline that it’s been offering to U.S. funding markets since a spike in rates in the middle of last month.

The Federal Reserve Bank of New York said Friday that it will conduct operations for overnight repurchase agreements through Nov. 4, having previously only scheduled them through Oct. 10. The central bank also announced eight new term offerings to provide additional funding through this month.

The central bank 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, as cash reserves were out of alignment with the volume of securities on dealer balance sheets.

“This tells me that they’re serious about providing liquidity through the end of the month,” said Mark Cabana, Bank of America‘s head of U.S. interest-rate strategy. “This type of announcement, just like a couple of weeks ago, is a ‘whatever it takes’ type of announcement.”

These measures are officially aimed at keeping the fed funds rate within the central bank’s target range. While those measures did bring the market more in line with this, there was a brief move upward in repo rates at the end of September as participants fulfilled quarter-end funding needs.

Prior to Friday’s announcement, some market observers had also flagged the potential for further repo-market squalls in the fourth quarter -- possibly as soon as next week.

Bank of America’s Cabana said the measures announced by the central bank had exceeded his expectations.

“The fact that they are willing to roll this deeper into November and to commit for such a long schedule suggests that they want to provide transparency,” he said. “They’ve heard that from the market and the Desk is being responsive to concerns.”

(Updates with comment, additional details.)

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net

To contact the editor responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net

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