20 minutes after today’s repo operation began, it concluded and there was some bad news in it: as we feared, yesterday’s take up of the Fed’s repo operation which peaked at $53.2 billion has expanded substantially, and according to the Fed, today there was a whopping $80.05BN in bids submitted, an increase of $27 billion, or 50% more than yesterday.
It also meant that since the operation – which is capped at $75BN – was oversubscribed by over $5BN, that there was one or more participants who did not get up to €5 billion in the critical liquidity they needed, and that the Fed will see a chorus of demands by everyone (because like with the discount window, nobody will dare to be singled out) to either expand the size of its operations, implement a fixed operation and/or – most likely as per the ICAP note yesterday – transition to permanent open market operations, i.e. QE
What is immediately notable is that except for agency paper, there was a greater use of both Treasury ($40.9BN to $51.6BN) and Mortgage-backed ($11.7BN to $27.8BN) collateral. The only silver lining: the step out rate on agency paper dropped from 3.00% to 2.1% however with virtually nobody using that, it is a largely meaningless easing in terms.
Finally, the worst news is that immediately after the operation, overnight repo remained elevated, with Reuters reporting the rate was 2.25%-2.60% after the latest repo operation, confirming that the liquidity shortage continues with the high end of repo still far above fed funds.
…click on the above link to read the rest of the article…