The Federal Reserve Bank of New York’s operation to inject cash into the financial system over the end of the year was oversubscribed on Monday, an indication that demand for funding through the beginning of 2020 remains ravenous.
Primary dealers submitted $54.25 billion in bids for the Fed’s 32-day term repo operation, which matures Jan. 17. That was more than the $50 billion on offer. This is the fourth term offering that is providing funding past the year-end period.
While scrutiny of the funding market is only set to intensify as December unfolds, investors are also keeping an eye on the middle of the month. That’s when the market faces potential pressures from Treasury settlements and corporate tax payments. Currently, the rate for overnight general collateral repurchase agreements is around 1.60%, after first trading around 1.70%, according to ICAP, That is within the central bank’s target range for the fed funds rate, another key short-end benchmark.
“Not only is the repo operation fully subscribed, but also the fact that in mid-December, with all of the settlements and all of the outflows, you’re seeing repo staying relatively well behaved,” said Mark Cabana, head of U.S. interest rates strategy at Bank of America. “This means we’re probably going to be in relatively stable territory until December 31.”
There were concerns last week that the market may be underpricing the risk of turmoil and that overnight rates would jump higher, which had at least one analyst speculating the Fed may need to embark on another round of quantitative easing.
The Fed has been injecting liquidity into the repo market since Sept. 17 when the overnight rate for general collateral spiked to 10% from around 2%. It has also been buying Treasury bills to add reserves to the system.
Before Monday’s term action, the three prior operations were all oversubscribed even after the sizes were increased to meet demand.
The Fed also conducted an overnight repo operation Monday with a limit of $120 billion. As with the most recent of these actions, it was undersubscribed, attracting just $36.4 billion of bids. That’s the lowest since Oct. 9, New York Fed data show.
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