The Fed injected $75bn in overnight cash into the financial system. The auction was oversubscribed for the second straight day, with banks demanding almost $84bn in short-term funding. The central bank hastily activated its repo operation on Tuesday for the first time since 2008, after a series of technical factors sent a pivotal measure of overnight funding costs surging.
Several strategists at big banks that act as trading counterparties for the Fed have said in recent days that the central bank should consider a different solution that provides more regular bursts of funding into the system. This is seen as particularly important before the end of financial quarters and years, these analysts have said, because of the risk of further bouts of cash outflows sparking renewed market dislocations.
JPMorgan analysts warned this week that the ructions over the past few days may be a “a prequel to what could come at year end when US banks significantly reduce their footprint in the money markets”.
However, repo traders and investors were left disappointed on Monday after the Federal Reserve provided little relief at its meeting, only committing to ad hoc operations as needed.
Some bankers are turning their attention to the end of September, which is typically a more strained time for the repo market as banks pull back and reduce the size of their balance sheets ahead of an important regulatory reporting date on the last day of the July to September quarter.
Bankers and investors have begun to call for a “term” repo facility from the Fed, where it would lend cash for as long as two weeks, to ensure players in the market have the money they need until after the end of the quarter has passed.
“They should walk in on Monday and say they are doing a $100bn, 10-day operation, then we aren’t going to be talking about this after quarter end,” said one banker.
Additional concern stems from the expectation that more cash could leave the repo market over the next week, as the US Treasury continues to build its own cash reserves.
Bankers and investors said on Wednesday that there was no one in the market willing to lend cash until after the end of the quarter, with expectations that the market should begin to settle down in the coming days.
“Right now there is so much uncertainty,” said Scott Skyrm, a repo trader at Curvature Securities. “No one wants to be the first one to buy something at 2.5 per cent and then they could come in the next day and rates are at 5 per cent.”