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Fed’s repo op is undersubscribed, suggesting dealers at capacity

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The Federal Reserve Bank of New York’s operation to inject cash into the financing system over the end of the year was undersubscribed on Thursday, a possible indication that dealer balance sheets are nearing capacity.

Primary dealers submitted $18 billion in bids for the Fed’s 14-day term repo operation, which matures Jan. 9. That was less than the $35 billion on offer and the third term operation aimed at year-end funding that has come in under the maximum amount. The Fed so far has injected roughly $203 billion and could offer as much as $260 billion more next week for the turn.

Providing sufficient liquidity for year-end is not simply a matter of the Fed offering enough repo, but also relies upon primary dealers transmitting it to the broader market, according to Jefferies money-market economist Thomas Simons.

With banks potentially bumping up against balance-sheet limits, that intermediation may become more difficult and the undersubscription of the most recent term operation doesn’t surprise Simons. He expects the next term operation on Dec. 30 will also be underutilized, but reckons that morning’s shorter-dated one-day forward operation -- which matures Jan. 2 -- will probably be taken up in full.

The Fed has been injecting liquidity into the repo market since the Sept. 17 when the overnight rate for general collateral repurchase agreements spiked to 10% from around 2%. It has also been buying Treasury bills to add reserves to the system.

The Fed also conducted an overnight operation Thursday with a limit of $120 billion. As with the most recent of these actions, it was undersubscribed, attracting just $28.8 bilion of bids.

Bloomberg News
Broker dealers Federal Reserve Bank of New York
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