Watch The FED REPO Calendar

Sometimes we hesitate even posting items like these–most of the times they turn out to be meaningless.

On the other hand better to post than anyone get a surprise.

1st off I am not an expert on repurchase agreements that the Federal Reserve executes, but I am knowledgeable enough to know that the FED is now–and has been, executing repurchase agreements with the ‘primary’ dealers of government debt since September. The Fed takes government securities (including agency backed mortgages) as collateral and lends the institution money so they have enough liquidity to serve their customers.

The primary dealers are typically large banks and securities companies which are trading counterparties for the Federal Reserve. They are expected to ‘make markets’ in government securities. They generally must make bids for government debt at auctions. This is all done to implement monetary policy.

With that said the New York Fed releases a monthly forecast of open market REPO operations.

The Fed last released a monthly forecast on 12/12/2019 which can be seen here. This forecast covers the period ending 1/14/2020–thus we should see a new forecast soon–the end of this week or Monday.

Here’s the problem. When the REPO facility was started back in September it was in reaction to a huge spike in overnight lending rates–they spiked as high as 8-10% as liquidity was unavailable for those needing money. Supposedly the liquidity was needed for tax payments and for settlements of U.S. government securities–it was implied this was a relatively short term problem.

GUESS WHAT-the issue seems to go on and on and whether this liquidity crunch will improve is anyones guess.

Today primary dealers offered $41 billion in collateral for a 14 day REPO, but the Fed only accepted $35 billion–this means less liquidity was supplied than the market thought it needed.

The question is – is the Fed going to try to withdraw liquidity? What will their next forecast show?

I will make my own forecast–the REPO will continue indefinitely. Additionally the size of the Fed Balance Sheet will continue to grow all throughout the year–there is no choice–the U.S. is going to run another $1 trillion dollar deficit.

4 thoughts on “Watch The FED REPO Calendar”

  1. Forget the news headlines…the real reason equity markets are starting to turn over may be because the Fed is back to withdrawing liquidity. Even implementing a net zero Fed expansion policy would be enough to give the QE junkies on Wall Street spasms at this point. To protect gains, I’ve started selling calls on some of my long positions and paring back on others.

  2. Tim, Please don’t hesitate to post these Fed updates – they are much appreciated. I know next to nothing about repos though these Fed actions do appear to support the notion that rate cuts and balance sheet expansion will contnue to be employed for whatever the Fed deems necessary to keep kicking the can. Supposed to inspire confidence, though I suspect these actions are creating the opposite sentiment for many of us.

    1. alpha8–the majority of the time I don’t bother posting, but will do more of it in the future.

  3. It seems the markets is seeing larger Fed Balance Sheet = higher Equity prices. I wonder when this absurd move up will end. We are close to Y2K madness. Maybe instead of a normal correction of 10% we’ll see a massive crash?

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