Demand for overnight funding from the New York Fed fell again on Tuesday, close to the lowest level in weeks, suggesting that the repo market is on a steadying footing.
Banks asked for $54.85 billion in overnight reserves, all of which were accepted by the N.Y. Fed. The Fed had said it would make up to $100 billion available. On Monday, the Fed provided $63.5 billion.
The Fed has been providing cash to banks through the market for repos, or repurchase agreements, for two weeks. 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.
Prior to the spike in interest rates, the market was typically settled without Fed intervention. Investors, such as money market funds and Federal Home Loan Banks, provided cash to Wall Street securities firms on an overnight basis, collateralized by ultra-safe securities such as Treasuries and mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
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.