Fed to Widen Treasury Buying, Expand Repo to Ease Market Strain
Comment of the Day

March 12 2020

Commentary by Eoin Treacy

Fed to Widen Treasury Buying, Expand Repo to Ease Market Strain

This article by Matthew Boesler for Bloomberg may be of interest to subscribers. Here is a section:

U.S. stocks trimmed staggering losses of more than 8% earlier in the day as investors absorbed the Fed’s muscular decision.

The buying will include coupon-bearing notes and match the maturity composition of the Treasury market, it said. Ten-year U.S. Treasury yields fell sharply to trade around 0.68%.

“The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities,” the New York Fed said.

Term repo operations in large size have also been added to help markets function, it also said. The New York Fed said it would offer $500 billion in a three-month repo operation at 1:30 p.m. and repeat the exercise tomorrow, along with another $500 billion in a one-month operation, and continue on a weekly basis for the rest of the monthly calendar.

Eoin Treacy's view

The call on the repo market is likely to continue to rise because banks, the world over, are increasingly starved of liquidity. The liquidity shortage that appeared in Q3 was but a foretaste of the difficult environment we are currently presented with and suggests the remedial action to ensure proper functioning of the money markets is going to be significantly larger than currently envisioned.

The Fed is treading a fine line between doing what is necessary and managing investor expectations. By acting too aggressively they risk causing a panic but if they are too timid investor angst will not be placated. It seems like they have not got the mix right just yet.

Right now, they are probably going to have do more with their actions than words and the quantity of money made available for repo is likely to grow substantially. The evolving situation leaves the Fed open to unlimited liability because it will be forced into providing a standing repo facility which means they are going to end up backstopping the global banking system.  

The size of the Fed’s balance sheet is likely to reach at least $6 trillion as it manoeuvres to tackle the challenges ahead.  

Christine Lagarde demonstrated today the ECB does not have any conception of the risks they are facing or they are playing hard ball to force governments into action. One way or the other, the official response is going to have to ramp up because the downward pressure on asset prices are going to force it.

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