Jump to content
House Price Crash Forum
Sign in to follow this  
Sancho Panza

Repo Rate Rise Gives Nod To Fed Tool In Eventual Policy Reversal

Recommended Posts

Bloomberg 2/12/13

'Dec. 2 (Bloomberg) --The Federal Reserve is starting to create a floor for money-market rates with a tool that may be pivotal to the central bank’s eventual siphoning of the unprecedented liquidity added to the U.S. banking system. The Fed has been extracting cash from the money markets since September through transactions known as reverse repurchase agreements, with Treasury debt as collateral. The operations have helped lift the rate for borrowing and lending Treasuries for one day to an average 0.11 percent as of Nov. 29. That’s up from 0.051 percent the day the facility was announced Sept. 20, according to a Deposit Trust & Clearing Corp. General Collateral Finance Treasury Repo Index.

The overnight, fixed-rate full-allotment reverse repo facility is also aimed at helping Fed officials address distortions in the short-term funding markets. The reverse repo facility allows money-market funds and some government-sponsored enterprises, in addition to banks and broker-dealers, to lend the Fed cash overnight at a fixed rate, currently 0.05 percent, with Treasuries as collateral for the loans.

“These are very small scale tests that the Fed is running, but anecdotally it seems to point in the right direction,” Antulio Bomfim, senior managing director at Macroeconomic Advisers LLC and a former Fed economist, said in a telephone interview on Nov. 26. “This is qualitatively consistent with what we expect would happen once they do start using this in volume. The facility will be a potentially very significant enforcement to a floor for money market rates.”

Bill Rates

Rates on Treasury bills with very short maturities have risen since September, even with only on average of $6.25 billion a day in the reverse-repo transactions since Sept. 23. One-month Treasury bill rates rose today to 0.0152 percent, from 0.0051 percent on Sept. 20.

Demand at the Fed’s reverse repo facility surged on Sept. 30, to $58.2 billion, as banks and funds sought to park cash safely to shore up their balance sheets at the end of the quarter, at a time when the Fed’s 21 primary dealers have less capacity to facilitate such trades.

The ability of the Fed to create a stable bottom on money-market rates will aid monetary policy when officials choose to lift the rate paid on excess bank reserves, now set at 0.25 percent, Bomfim said from Washington. The DTCC’s GCF Treasury repo index averaged 0.117 percent over the past year, while the Fed’s so-called IOER has been unchanged at a quarter of a percentage point.

Excess Reserves

“It’s looking like the Fed is thinking now of using this facility in the short- to medium-term as a way to floor rates even though we will remain in a sort of zero-interest rate policy, broadly speaking, for the next few years,” Carl Lantz, head of interest-rate strategy at Credit Suisse Group AG in New York, said in Nov. 25 telephone interview. “The corollary to this is that the facility also opens the door for the Fed to cut the rate it pays on excess reserves. We think they are probably going to start considering bringing these rates into line.”

Fed Reserve Vice Chairman Janet Yellen last month left open the possibility that the central bank could reduce the interest rate it pays on bank reserves as a way of aiding the economy, in response to a question on Nov. 14 in a hearing on her nomination to succeed Ben S. Bernanke as chairman.

Testing Period

While the Fed gained the ability in 2008 to pay interest on cash it holds in the form of excess reserves, that tool has had limited effect in anchoring borrowing costs because only banks are able to earn such interest. The new facility, when at full capacity, given it being open to a wide array of counterparties, will keep money market rates more in line with the IOER, according to Lantz.

The facility’s testing period is scheduled to end on Jan. 29, with the fixed rate on the transactions already at the maximum permitted, up from 0.01 percent when it began.

“Given the current levels of usage, there is no economic reason why the facility should be providing a floor to the market, as it would if it was truly full-allotment,” Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York, said in a Nov. 25 telephone interview. “Why repo rates have risen is a bit puzzling. One reason may be psychological, given that money-market participants know they can go to the Fed with up to a billion dollars.”

Treasury bills and repo rates have dipped below zero sporadically during the Fed’s three bond-buying programs, known as quantitative easing, as it reduced securities available to use as collateral in repo transactions. Treasury bills that mature in a month traded below zero percent last month, touching negative 0.0051 percent on Nov. 27.

‘Somewhat Succeeding’

The reverse-repo facility tests are aimed “to gain operational experience with larger transactional flows and to provide additional information about how such operations might improve interest rate control regardless of the size of the Federal Reserve’s balance sheet,” the New York Fed said in a statement when the facility was announced Sept. 20.

“The reverse-repo facility makes a lot of sense as a way to set a floor under money market rates and is already somewhat succeeding in pushing front-end rates higher,” Subadra Rajappa, a fixed-income strategist at New York-based Morgan Stanley, said in a Nov. 25 telephone interview. “The facility would also help when the Fed decides to hike the IOER. Without the facility, the Fed could end up in a situation where they are trying to hike rates and money market rates still remain very low.”'

Share this post


Link to post
Share on other sites

Bloomberg 2/12/13

'Dec. 2 (Bloomberg) --The Federal Reserve is starting to create a floor for money-market rates with a tool that may be pivotal to the central bank's eventual siphoning of the unprecedented liquidity added to the U.S. banking system. The Fed has been extracting cash from the money markets since September

Siphoning is so cool, like total magic. Regularly use one to remove water that's collected in bottom of our old fridge, before disinfecting it, and it's always a bit of fun to do. Liquid goes up, liquid goes down and out.

Can't break this story down by myself. They're preparing things to eventually try and allow market to stand by itself? If finance houses can't get the same yield, do they chase it elsewhere, or does it bring caution, and perhaps even they look to people who owe them money?

Share this post


Link to post
Share on other sites

Siphoning is so cool, like total magic. Regularly use one to remove water that's collected in bottom of our old fridge, before disinfecting it, and it's always a bit of fun to do. Liquid goes up, liquid goes down and out.

Can't break this story down by myself. They're preparing things to eventually try and allow market to stand by itself? If finance houses can't get the same yield, do they chase it elsewhere, or does it bring caution, and perhaps even they look to people who owe them money?

Me neither. I read it but I'm unsure which way the water should be flowing.

Share this post


Link to post
Share on other sites

The perils of a small cadre of academic economists who have virtually zero experience in commercial business attempting to micromanage the decisions of millions of individuals.

My advice to these 'Masters of Money': read through the TIME magazine archives from 1928 to 1940 and then tell me that what you are doing today is any different from the counterproductive and ineffectual control that your predecessors tried to exercise all those years ago.

Edited by FreeTrader

Share this post


Link to post
Share on other sites

They're preparing things to eventually try and allow market to stand by itself? If finance houses can't get the same yield, do they chase it elsewhere, or does it bring caution, and perhaps even they look to people who owe them money?

Looks like the preamble to allow rates to rise without killing liquidity altogether.

Fed takes cash and swaps it for some of the T Bills it has on it's balance sheet.Drains excess reservesfrom the system and lifts money market rates ie getting the market used to higher rates gently.I'm struggling to see how it'll reduce the Fed's balance sheet longer term as part of the repo will be them taking back the T Bills,unless of course they don't,in which case it won't be a reverse repo any more.

They're also looking to cut the rate they pay on excess reserves,thus forcing banks to use the reverse repo instead and forcing more liquidity into the system.Eventually,the reverse repo will be open to a wide range of organistions.

If it looks and sounds like a CB/Banking sector mutual reacharound,then it probably is.

I'm interested in anyone who can fully explain the logic here,as I just can't see it.

Edited by Sancho Panza

Share this post


Link to post
Share on other sites

The perils of a small cadre of academic economists who have virtually zero experience in commercial business attempting to micromanage the decisions of millions of individuals.

This

Share this post


Link to post
Share on other sites

Looks like the preamble to allow rates to rise without killing liquidity altogether.

Fed takes cash and swaps it for some of the T Bills it has on it's balance sheet.Drains excess reservesfrom the system and lifts money market rates ie getting the market used to higher rates gently.I'm struggling to see how it'll reduce the Fed's balance sheet longer term as part of the repo will be them taking back the T Bills,unless of course they don't,in which case it won't be a reverse repo any more.

They're also looking to cut the rate they pay on excess reserves,thus forcing banks to use the reverse repo instead and forcing more liquidity into the system.Eventually,the reverse repo will be open to a wide range of organistions.

If it looks and sounds like a CB/Banking sector mutual reacharound,then it probably is.

I'm interested in anyone who can fully explain the logic here,as I just can't see it.

Is slightly confusing as I think of reverse repos being a standard tool of the fed in managing reserves in the system and so managing the interest rate. So if there are a shortage of reserves the fed does a repo (so lending reserves against govt bond collateral I.e. bank gives them a govt bond, fed gives bank reserves, at maturity fed returns the bond, back pays back reserves). This is allows fed to control upper band of interest rate, as the rate it charges on repo will cap market rate.

Conversely when there are excess reserves fed performs reverse repo, so borrowing reserves from bank against govt bonds. This drains excess reserves and sets floor on interest rate, as they will pay whatever rate they want to floor at, so banks will always lend there excess reserves to fed, as it is paying above market rate.

As such this is a standard tool. I guess what is weird here is they are actively putting excess reserves into the system via QE, so negating need for standard operations, but then performing them against the flow caused by themselves.

One point from your post above. This is removing liquidity, not providing it.

Edited by terryturbojr

Share this post


Link to post
Share on other sites

Slightly confusing?

The bank makes a sort of annnouncement and passes it to a journo who changes the slant on it either deliberately to create a headline or gets it wrong due to being a useless financial journo, and people are only slightly confused.

The Fed does a couple of things.

It monetises assets as collateral for fixed terms at interest...ie, it creates wealth backed asset.

it withdraws money by collecting repayments for said issuance.

The first one has been perverted as the Fed has BOUGHT assets and there is no collecting repayments in the usual way.

anything else is nonsense and counter capital formation through inflation and low returns...ie, financial repression of the economy to save a few banks.

They can dress it all up in fancy words, detailed white papers, fussy web sites, but what they do is so simple as to beggar beleif.

Share this post


Link to post
Share on other sites

One point from your post above. This is removing liquidity, not providing it.

This is where I'm confused Terry.On the one hand they're conducting a reverse repo which drains liquidity,on the other,they're they're dropping the interest rate they pay on excess reserves,which will surely increase liquidity?

Share this post


Link to post
Share on other sites

This is where I'm confused Terry.On the one hand they're conducting a reverse repo which drains liquidity,on the other,they're they're dropping the interest rate they pay on excess reserves,which will surely increase liquidity?

I'm wondering if what they're doing is seeing if standard tools for seeing the interest rate floor, ie reverse repo, work in a non standard world. So removing the non standard interest on reserves and going back to repo. Sounds like a way to raise rates without removing QE first.

Share this post


Link to post
Share on other sites

I'm wondering if what they're doing is seeing if standard tools for seeing the interest rate floor, ie reverse repo, work in a non standard world. So removing the non standard interest on reserves and going back to repo. Sounds like a way to raise rates without removing QE first.

I haven't got my head round it fully but that is along the lines I was thinking. Presumably using 2 "levers" might give a bit more control than just using 1 more crudely. The aim being more market rather than Fed responsibility for liquidity with a lag to the Fed toning down its liquidity efforts.

Sounds like test to see if they are pushing on string or a steel rod before having a big push...

Share this post


Link to post
Share on other sites

I'm wondering if what they're doing is seeing if standard tools for seeing the interest rate floor, ie reverse repo, work in a non standard world. So removing the non standard interest on reserves and going back to repo. Sounds like a way to raise rates without removing QE first.

I think you've hit the nail on the head.That makes sense in light of the growing need to find a way to prepare the world for life post taper.

The net effect of going from dropping excess reserve rate to using reverse repo may well be negligible but it's an important distinction as reverse repo enables them to gently raise rates and see if the system creaks.

Share this post


Link to post
Share on other sites

I haven't got my head round it fully but that is along the lines I was thinking. Presumably using 2 "levers" might give a bit more control than just using 1 more crudely. The aim being more market rather than Fed responsibility for liquidity with a lag to the Fed toning down its liquidity efforts.

Sounds like test to see if they are pushing on string or a steel rod before having a big push...

Which it is until Jan 14,then they'll widen it beyond the PD network.

Share this post


Link to post
Share on other sites

Sounds like another of their bluff games like pretending they were going to taper and then not tapering. The taper bluff won't work again for some time so they've got to try something else.

That none of them have a clue what the eventual outcome will be is quite another matter of course.

Share this post


Link to post
Share on other sites

I think you've hit the nail on the head.That makes sense in light of the growing need to find a way to prepare the world for life post taper.

The net effect of going from dropping excess reserve rate to using reverse repo may well be negligible but it's an important distinction as reverse repo enables them to gently raise rates and see if the system creaks.

The problem is reverse repo relies on the fact that all reserves are sucked up. If they're not then people are still left sat on reserves which, in the absence of a floor rate, they will lend at every decreasing rates as any rate better than nothing. This drives market rates down. So to set a floor the fed has to borrow all excess reserves, so reversing QE.

I assume this is what the bloke above is alluding to when he says it shouldn't work when it isn't full allotment.

Edited by terryturbojr

Share this post


Link to post
Share on other sites

The problem is reverse repo relies on the fact that all reserves are sucked up. If they're not then people are still left sat on reserves which, in the absence of a floor rate, they will lend at every decreasing rates as any rate better than nothing. This drives market rates down. So to set a floor the fed has to borrow all excess reserves, so reversing QE.

I assume this is what the bloke above is alluding to when he says it shouldn't work when it isn't full allotment.

Logically,that leads one to conclude that the widening of participation beyond the PD network and the winding down of QE will go hand in hand.There's only one reason there's so much liquidity in the sytem and that's QE.So they go to full allotment and prepare to taper.

The problem is that down the line,will will surely create a world where the fed is the only game in town.Why lend to each other when you can trade with the Fed.This would be particualrly so in times of stress.

o/t I struggle to see how the fed will be able to unwind it's balance sheet,when they're creating the demand for UST's at the same time as they're trying to reverse repo them.

Share this post


Link to post
Share on other sites

Sober Look 2/12/13

'Contracts worth hundreds of trillions - ranging from corporate loans to mortgages to rate swaps and LIBOR futures - are all priced based on a relatively small unsecured interbank lending market. Also a fairly large group of contracts (in the trillions) is linked to the fed funds rate, which is derived from the bank-to-bank loan market as well. Given its importance, here are some facts about the interbank lending market in the US.

1. The volume of unsecured loans among US banks has collapsed in recent years. Banks fund themselves with deposits, bonds, repo, commercial paper, etc. After the 2008 experience, borrowing from other banks is rarely a material part of banks' funding strategy. The situation in Europe's interbank markets is even worse.

Interbank+loans.PNG Interbank loans outstanding

2. While most of the LIBOR-based contracts are linked to the 3-month rate, the bulk of the interbank market on which these contracts are based is overnight. It is rare to see banks lending to each other for more than a week or two. This is the main reason that some trading desks were able and incentivized to manipulate the LIBOR index (1-3 month lending market often just didn't exist).

3. Some may find this a bit confusing but the overnight LIBOR rate and the "fed funds effective" rate are two different ways of measuring essentially the same thing: the rate at which banks lend dollars to each other overnight. The reason for the differences in the two indices is the universe of banks and the methodology used to determine the averages.

ON+LIBOR+vs+Fed+FUnds+Effective.PNG Red = Fed Funds Effective; Blue = O/N LIBOR

4. The largest lenders in the US overnight unsecured market are not even commercial banks. According to the NY Fed, most overnight liquidity is provided by the Federal Home Loan Banks (FHLBank System), which are government-sponsored entities (h/t Kostas Kalevras - @kkalev ). Unlike regular US banks, FHLBs receive zero rate on the reserve cash with the Fed. That's why they tend to lend their cash out to banks overnight at 7-12 bp (which is still better than zero). That is also why the fed funds rate and the overnight LIBOR are significantly lower than the 25bp paid on reserves.

And here is the kicker. Some privately owned commercial banks borrow these funds from FHLBs and often leave them on deposit with the Fed at 25bp. This spread between the interest on reserves and the interbank loan rate (fed funds effective) is basically free and riskless revenue for the banking system - courtesy of the federal government.

: - FHLBs aren’t eligible to earn IOER [interest on excess reserves], they have an incentive to lend in the fed funds market, typically at rates below IOER but still representing a positive return over leaving funds unremunerated in their Federal Reserve accounts.
Institutions have an incentive to borrow at a rate below IOER and then hold their borrowed funds in their reserve account to receive IOER and thus earn a positive spread on the transaction.

Fed+Funds+Lending.PNG Source: NY Fed

5. It's enough of a problem that trillions worth of contracts are priced based on this shrinking market. Now consider the fact that the Fed's traditional tool to target monetary policy is based on the overnight interbank market where participants use government agencies to create a riskless arbitrage. And unless there is a change, the Fed will return to targeting the fed funds rate as its primary tool, once QE ends. That is why the pressure is building on the central bank to develop alternative methods (see post) for targeting short-term rates that will actually impact the broader economy.'

Share this post


Link to post
Share on other sites

On that latter point,the need for an alternative method for targetting short term rates,

Sober Look 21/8/13

'Fed contemplates creating "overnight reverse repo facility"

Today investors focused on the broad support for tapering in the July FOMC minutes, driving treasury yields sharply higher.

++10+Yield.PNG 10yr treasury yield (source: Investing.com)

There was however another passage in the minutes that wasn't broadly covered in the mass media.

July FOMC minutes: - In support of the Committee’s longer-run planning for improvements in the implementation of monetary policy, the Desk report also included a briefing on the potential for establishing a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates. The presentation suggested that such a facility would allow the Committee to offer an overnight, risk-free instrument directly to a relatively wide range of market participants, perhaps complementing the payment of interest on excess reserves held by banks and thereby improving the Committee’s ability to keep short-term market rates at levels that it deems appropriate to achieve its macroeconomic objectives.

It's an interesting development because this project could potentially achieve three objectives:

1. The "full-allotment overnight reverse repurchase agreement facility" can provide competition for bank deposits. While deposits of under $250K rely of the FDIC insurance, corporate and institutional depositors remain concerned about bank credit risk because in a bankruptcy depositors become unsecured creditors. By allowing non-banks to participate, the Fed creates a deposit account that is free of counterparty risk (currently the only way to achieve this is by purchasing treasury bills).

2. Instead of just changing the interest paid on bank reserves to manage short-term rate policy (in addition to the fed funds rate), the Fed would now have another monetary tool - adjusting rates paid on these types of broadly held accounts.

3. By accepting broader deposits, the Fed can effectively "soak up" excess liquidity and "sterilize" some of its securities holdings. And by adjusting these rates, the central bank could fine-tune how much liquidity these accounts attract. This reduces the need to sell securities in order to drain liquidity from the system.'

Share this post


Link to post
Share on other sites

In Significant Test, Fed Facility Fails to Defend Short-Term Rate Floor

Repo Rate Falls to Zero as Heavy Demand for Facility Exceeds New Caps on Its Use

Sept. 30, 2014

From the WSJ, but article is behind paywall or membership wall.. accessible in full from here:

http://acrossthecurve.com/?p=17195&cpage=1

Share this post


Link to post
Share on other sites

so they understand that they have created massive liquidity (money printing) and need a tool to stop the money having no value.

And the tool didnt work and money went to zero value...in the shadow banking system.

Is that it?

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   224 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.