Funding pressures spur first full-sized Fed repo op in three weeks

NEW YORK: Signs of pressure in dollar funding markets are reappearing, with rates for repurchase agreements at elevated levels and the Federal Reserve’s overnight operation coming in fully subscribed for the first time in three weeks.

The New York Fed took $75 billion of securities in its overnight system repurchase agreement operation Wednesday, according to its website. That was the maximum amount on offer for the action and less than the $80.35 billion in bids it received. The last time such an overnight offering was fully subscribed was Sept. 25.

The rate on overnight general collateral repo was around 2.15% on Wednesday morning in New York, according to ICAP data. That’s above the range of 1.75%-2.00% that the central bank currently maintains for the federal funds rate, a separate short-term benchmark that it targets for monetary policy.

“This tells you there’s some residual stress in the market and the problem is not fixed,” said Gennadiy Goldberg, senior rates strategist at TD Securities. “This is why the Fed is so keen to start bill purchases and very keen to continue repo operations.”

Overnight repo rates were also above 2% the previous day, climbing to around 2.28% on Tuesday afternoon as the additional collateral in the market generated by settlements of recent Treasury auctions increased pressure. An unwinding of trading positions in the wake of a three-day weekend for the U.S. bond market may also have had an impact.

The increase in repo rates comes even as the central bank continues with the various repo operations that it’s been conducting since Sept. 17, although they remain well below the record levels reached last month that prompted the Fed to step in in the first place. The episode back then saw the rate on overnight repos jump to around 10%, but it subsequently moved back to more normal levels below 2%.

The Federal Reserve Bank of New York’s next term repo operation is scheduled to take place Thursday.

The central bank is also scheduled to begin buying Treasury bills from Wednesday as part of its effort to improve its control over shortterm rates, having announced the $60-billion-a-month plan last week.

“The Fed hasn’t fixed the underlying causes, only the symptoms,” Goldberg said. “Today they’ll start fixing the causes.” — Bloomberg