The day before the end of the monetary policy meeting, the US central bank injected $ 75 billion into the market to alleviate a drastic restriction on short-term financing.
The Federal Reserve injected $ 75 billion into the US financial system to alleviate the dramatic pressure on the country's short-term financial market.
The cost of lending cash in exchange for one-day US Treasury bonds through repurchase agreements, known as repurchase agreements, increased between Monday afternoon and Tuesday morning to 10%, with an increase of plus four times, as shown by Refinitiv data.
Repurchase agreements are an important way for banks to raise funds in the short term by agreeing to buy and sell very short-term securities. As such, they are a vital lubricant of the financial system.
The sudden adjustment of the market caused a difficult situation for the Federal Reserve just when the main political leaders met in Washington to make a decision on interest rates.
The jump in the repo rate has an impact on the federal funds rate, the central bank's main monetary policy instrument. He dragged the federal funds rate up to 2.25%, the top of the Fed's target range.
In response, the New York Fed, which carries out market operations for the central bank, said on Tuesday it will launch an unusual transaction "to help maintain the federal funds rate within the range target".
The New York Fed has made available up to 75 billion US dollars through a recovery auction in which the Fed accepts Treasury securities and other securities as collateral and, in exchange, provides liquidity that lubricates the system.
The New York Fed had to cancel the transaction on its first attempt due to "technical problems". In the second attempt, the main operators, the big banks that act as commercial counterparts of the Fed, resorted to the structure for 53 billion US dollars.
The transaction appears to have succeeded in stabilizing the money markets. The interest rate dropped to around zero shortly after the Fed announced its move.
Analysts have stated that there are technical factors that have narrowed the repo market rather than the systemic problems that led to much higher overnight rates during the financial crisis. The market was hit by companies that took cash to pay taxes. An excess of treasury bills, which are used by the other side of the trade, has created an imbalance that has increased the repurchase rate.
Ashish Shah, co-director of fixed income investments at Goldman Sachs Asset Management, described the movements in the repo market as a "big problem".
"When such things happen, uncertainty increases and the fixed-income markets leave you nervous. And this is the task of the central banks to avoid "
Some analysts have indicated a more structural explanation for the strong upward movement in the repo market. The Federal Reserve has reduced the size of its balance sheet, which also reduces the amount of bank reserves held in the Federal Reserve, limiting the liquidity available for short-term payments.
"We believe the culprit is the shortage of bank reserves, which are the only activity that provides intraday liquidity to banks," said TD Securities. "The reserves have been falling since 2014 and we expect them to fall further as the Treasury cash balance and currency in circulation increase."