The New York branch of the U.S. Federal Reserve said Tuesday that it was prepared to add as much as $75 billion in cash to broader markets in order to hold the Fed's key rate inside its target range.
The so-called Repo operation, during which twenty four Primary Dealers in the Fed system can exchange eligible collateral, such as U.S. Treasury bonds or mortgage-backed securities, for cash. The move comes amid a massive surge in the price of what is known as 'general collateral", which is normally the cheapest batch of securities that banks use to pledge against cash, or other assets. The Fed ended up taking $53 billion worth of collateral, around 70% of its $75 billion cap.
"Primary Dealers will be permitted to submit up to two propositions per security type," the NY Fed said. "There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type, and are subject to a minimum bid rate of 2.10%.
9:17 --> *NEW YORK FED TO CONDUCT OVERNIGHT REPO OPERATION TODAY
First one in 10 years and there is some dust on it:— George Pearkes (@pearkes) September 17, 2019
9:44 --> *N.Y. FED CANCELS REPO OPERATION DUE TO TECHNICAL DIFFICULTIES
*N.Y. FED SAYS REPO OPERATION TO BE REOPENED AS SOON AS POSSIBLE
In a repurchase, or repo, transaction, the buyer of the securities, in this case the NY Fed, agrees to sell them back at a fixed point in time, in this case a 24-hour period that would end tomorrow morning.
The costs for borrowing general collateral, often referred to as GC, spiked by 2.5% on Monday, and was followed by a 6% surge today, taking the price to as high as 8.75% at one point, some 6.5% higher than the upper-end of the Fed's target rate range.
The Fed's announced operation, however, pushed that overnight rate back down to 0% shortly after it was launched, isolating, for the moment at least, any cash crunch that either a primary dealer or one of its largest clients could be facing.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked modestly lower at 98.55 in early New York trading, suggesting no major rush for dollars in international markets. Benchmark 2-year Treasury note yields, meanwhile, were seen at 1.756%. little-changed from their opening levels during Asia tradnig.
The CME Group's FedWatch tool, which attempts to assign a tradeable probability to near-term rate moves, is only pricing in a 65.8% chance of a 25 basis point rate cut tomorrow in Washington, but that figure likely under-estimates the market's actual expectation, given that yesterday's spike in overnight funding rates likely caused one-time movements in money markets that influenced the FedWatch calculations.