Demand for overnight funding came in lower than what the Federal Reserve Bank of New York offered Monday, perhaps indicating that the Fed’s assistance has relieved some of the stress in the repo market.
Banks asked for $63.5 billion in overnight reserves, all of which was accepted by the N.Y. Fed. The Fed had said it would make up to $100 billion available.
The Fed provides the cash to banks through the market for repos, or repurchase agreements. In exchange for the cash, the banks provided $49.75 billion of Treasuries and $13.75 billion of mortgage-backed securities that they agreed to repurchase the following day.
The Fed operations have been ongoing since interest rates spiked beyond the Fed’s target interest rate for overnight bank funding in a different market, the federal funds market. Typically, the implied rate for repo borrowings is within the range for fed funds targeted by monetary policy. But
There was some concern that demand for short-term funding could be elevated on Monday due to the end of the third-quarter. Monday’s operations, however, indicates that the market may be under less stress than it had been.
The precise cause of the repo market’s misbehavior is not known. It is thought to be a result of the combined effect of regulations requiring banks to hold liquid assets, the Fed’s reversal of quantitative easing removing dollars from the financial system, the expansion of the federal deficit adding Treasurys, and the quarter-end timing.