Credit Squeeze Tightens Grip

"The phrase that keeps coming up on our trading floor is, 'We're looking at Y2K here,' " says T.J. Marta, fixed income strategist at RBC Capital Markets. He's recalling the last time fixed-income markets were so fearful of a liquidity crunch that the Fed intervened with larger, long-term liquidity injections to promise stability.

Marta's trading floor is not so far off. The Fed has done longer-duration year-end liquidity operations in past years, though this is the largest single long-term repo since the days before Y2K. Then the Fed announced 90-day open market operations, an expansion of collateral accepted by the Fed for liquidity, and a "Standby Financing Facility" to ease in the new millennium for the banking system.

The most recent long-term operation was a 28-day, $5 billion operation in December 2005, a $4 billion, 52-day operation in November 2004, and two $4 billion operations in 2003, according to New York Fed records.

If traders are right, and this is Y2K redux, the market panic will be for naught. Too bad the mortgage resets can't just come and go like New Year's Eve.