The Federal Reserve Bank of New York saw huge demand from banks Wednesday morning, as they rushed to bid on the $75 billion on offer in a second day of intervention to ease a crunch in overnight funding markets.
FT: Fed sees huge demand for cash after money market jolt, Sept 18, 2019
Banks and investors rushed on Wednesday to gobble up $75bn in short-term cash the Federal Reserve made available in a second attempt to steady one of the world’s most important money markets. Dealers submitted requests for over $80bn in overnight borrowing, exceeding the maximum amount the New York Fed had placed on offer. That amount far exceeded the $53bn demanded when the central bank stepped into the market on Tuesday for the first time in more than a decade.
The Federal Reserve injected $75 billion into U.S. money markets as policy makers’ benchmark rate broke outside their preferred band, ratcheting up the pressure on central bank officials to find a long-term fix for the financial system’s plumbing. There is evidence things are calming down. For instance, the rate for general collateral repurchase agreements has dropped to 2.175%, down from Tuesday’s record high of 10% and about where it was last week.
The recent climb in overnight repurchasing rates, used by hedge funds and other leveraged investors to finance their trading operations, has resulted in a knock-on increase in the fed funds rate. Since both are short-term sources of funding for investors, a rise in the overnight repurchasing rate means that borrowers in fed funds have to pay up to attract investors, pushing up the central bank’s benchmark interest rate.
JPMorgan Chase & Co (JPM.N) Chief Executive Jamie Dimon credited the U.S. Federal Reserve on Wednesday with doing the “right thing” in supporting the overnight funding needs of banks after borrowing costs suddenly spiked on Monday. Dimon, who spoke to reporters at an event hosted by the Business Roundtable in Washington, said he did not believe the funding squeeze problem that prompted the Fed to act was a cause for immediate concern. But he said it highlighted underlying structural issues with the market that should be fixed.
Some of the explainers are pretty wonky, so you’re forgiven if you can’t quite wrap your brain around what it all means. Basically, the repo market is like plumbing in the U.S. financial system, making sure banks have enough cash to meet their short-term needs. A repo trade happens when a firm offers high-quality securities, like U.S. Treasurys UST as collateral to raise cash and finance their trading and lending activities overnight. The borrowers the next day pay back those loans, with interest — essentially, they repo the bonds.