Sunday, November 2, 2014

The Fed to release $600bn of treasuries into the reverse repo market at year-end

Staying with the theme of the Federal Reserve's experimentation with new policy tools, the central bank is expected to introduce a term (vs. overnight) reverse repo program (RRP - see overview). This offering will be specifically targeting the year-end (the so-called "turn"of the year). The amount of term reverse repo is expected to be $300bn - effectively doubling the total RRP available.

The Fed has been surprised with the degree to which "window dressing" activities' plays a role in money markets (see post). The demand for RRP at quarter-ends (paying 5 basis points on overnight money) has been higher than expected. The Fed ended up capping the overall size of the program to $300bn in order to avoid disrupting the repo markets.

Source: Deutsche Bank
(note that the decline between Q2-end and Q3-end has to do with the introduction of $300bn overall cap)

The point on window dressing was driven home at the end of September, when quarter-end driven demand for quality collateral resulted in over $400bn in RRP bids. The final transaction was executed at zero rate (as opposed to the usual 5bp). Participants were willing to park quarter-end overnight cash with the Fed for free (in fact the low bid was -20bp) in order to maximize riskless assets on their reported financials.

Source: NY Fed

This means that the year-end demand is likely to far exceed the $300bn currently made available. In December the Fed will therefore begin offering term reverse repo maturing around January-2. Doubling the availability over the turn will feed the repo markets, temporarily releasing $600bn of treasuries from the Fed's balance sheet.

Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via and are NEVER sold or otherwise shared with anyone.

Related Posts Plugin for WordPress, Blogger...
Bookmark this post:
Share on StockTwits