Investors reportedly snapped up $25 billion of short-term loans offered by the Federal Reserve in an attempt to insulate themselves from a potential spike in borrowing costs.
The New York branch of the Fed has been offering loans in the repo market since an alarming jump in overnight borrowing costs there in September.
The 42-day term repo operation which took place Monday attracted $42.55 billion in bids, more than the $25 billion on offer, while a similar action on on Nov. 25 garnered $49.05 billion in bids.
“There is a lot of demand to lock up funding going into year-end,” Jon Hill, an interest rate strategist at BMO Capital Markets, told the Financial Times.
As a reult, the Fed has boosted the size of the third operation it has scheduled to inject cash into money markets over year-end after the first two were oversubscribed, Bloomberg reported.
The central bank lifted the maximum offering size for next Monday’s 28-day repurchase-agreement operation to at least $25 billion from a previously announced level of $15 billion.
The heated demand comes as money-market participants, wary of year-end funding risks, look to take sock away cash.
The upsizing of next Monday’s operation follows a similar move that the Fed undertook to increase the size of the most recently conducted action. 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% from around 2%. The Fed has also begun buying Treasury bills to add reserves into the system.
“The speed of the adjustment signals that they’re being as pro-active as possible into year-end,” said BMO Capital Markets strategist Jon Hill. “If they were slow, folks would start worrying they were playing catch up.”
The fact that the Dec. 2 operation was oversubscribed “suggests there’s a true need,” Priya Misra, head of global interest rates strategy at TD Securities, said before the Fed announced the latest size boost. “They don’t want to become the repo market, but they’re clearly very flexible and the intent is clear that they will do whatever it takes so the plumbing doesn’t seize up.”
The Fed’s overnight repo operation, as has been the case with most such actions recently, was undersubscribed on Monday. It attracted $72.9 billion of bids, less than the maximum offering size of $120 billion.
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