The New York Federal Reserve received nearly twice the amount requests for year-ending funding than it was prepared to offer Monday, suggesting the underlying issues that sparked concern in the repo markets last month have not been addressed.
The NY Fed said it accepted $25 billion in bids, from a total of $49 billion placed at the central bank, for term funding that will expire in early January. The repo operation is the first to cover so-called year-end funding, during which banks seek to mange risks during the thin liquidity of the holiday season.
In a so-called repo, any of the 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 banks will then repurchase those same securities at a fixed point in time, in this case a 42-day period that would end on January 4.
The NY Fed's injection, which also included $68.5 billion in overnight repos, followed quarterly data Friday which showed that some U.S. lenders would need to add more protective capital to their balance sheets if they wished to increase activity in overnight lending markets.
If those banks opted to slow their activities, however, in order to avoid surcharges that could erode profitability, overnight and short-term borrowing costs could jump between now and the end of the year.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.1% higher at 98.34 in early New York trading following the repo operations, and was trading at the highest level in a week, suggesting increasing demand for dollars in international markets.
Benchmark 2-year Treasury note yields, meanwhile, were seen at 1.64%, largely in-line with last week's late-trading levels.