The Federal Reserve has injected tens of billions of dollars into the financial system for the fourth consecutive day, in an intervention that has steadied conditions in the US money market after a jolt of volatility.
After an unusual jump in borrowing costs earlier this week, the central bank’s New York branch intervened in the short-term money markets for the first time in a decade. On Friday, it kept up the pace of that support, with banks making full use of the $75 billion in overnight funds on offer.
That helped the overnight Treasury repo rate, which had surged to 10 per cent on Tuesday, recede to 1.95 per cent. The effective federal funds rate, which is the Fed’s main policy tool, also slotted back into the central bank’s intended range.
It registered 1.9 per cent on Thursday, compared with the Fed’s goal of 1.75 per cent to 2 per cent. The rate on Tuesday shot above its target in an unusual breach that some analysts said suggested the central bank had at least temporarily lost control of the market.
Analysts blamed a confluence of factors - some structural and others temporary - for this crunch in a part of the money markets where Treasuries are exchanged for cash in transactions that reverse overnight.
“None of these pressures was extraordinary or unforeseen, but together they had an extraordinary impact,” said Jerome Schneider, head of short-term portfolio management at Pimco, the world’s biggest bond manager.
Funds
He echoed the analysis of others, saying $35 billion was yanked from money market funds before US corporate tax payments were due on September 15th. At the same time, dealers needed to finance an additional $20 billion in Treasuries, acutely increasing the demand for cash sourced through repo transactions.
Generally, banks would have stepped into the repo market. But falling excess reserves meant that they were less willing to use their cash in repo transactions.
US banks and investors have warned that these sorts of flare-ups may well occur again during quarter and year ends, when there is typically a high demand for cash.
“We think investors should be prepared for deteriorating liquidity in the funding markets into year-end and the impact of this on the financial markets as a whole, with potential costs for levered strategies and risk assets in particular,” said Mr Schneider.
Attention has turned to the New York Fed to see if it intends to roll out a permanent facility for injecting cash into the markets for potentially longer terms to provide a more lasting pressure valve for the money markets. – Copyright The Financial Times Limited 2019
