NEW YORK (Reuters) – A key borrowing cost for Wall Street remained elevated on Tuesday near the end of the quarter even after the Federal Reserve injected $30 billion in longer-term cash into the U.S. banking system a week after turmoil in money markets.
FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo
This cash through 14-day loans to primary dealers was seen as a much needed boost for banks and Wall Street to avoid facing another cash crunch, analysts said.
“It feels like things are better, but it doesn’t feel like things are back to normal yet,” said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.
The $30.0 billion worth 14-day loans from the Fed was less than half of what primary dealers had bid for at a term repurchase agreement (repo) operation on Tuesday.
At a Fed repo operations, primary dealers, or the top 24 Wall Street firms that do business directly with the Fed, borrow from the central bank by using their Treasuries and other bonds as collateral.
This 14-day funding bolstered the daily cash injection of up to $75 billion through overnight repos the Fed put in place a week ago.
(GRAPHIC: U.S. Fed repos – here)
The Fed will hold two more 14-day term operations, worth at least $30 billion each, on Thursday and Friday.
Overnight borrowing cost in the $2.2 trillion repo market has been running at about 2% since Monday, well below a peak of 10% reached last Tuesday – a level not seen since the height of the global financial crisis in 2008.
Analysts generally blamed a shortage of bank reserves as the culprit for last week’s market turbulence, together with huge seasonal payments for taxes and Treasury supply.
Still analysts said demand for funding will likely remain elevated going into quarter-end when repo lending tends to decline as banks want to conserve cash on their balance sheets to meet reporting requirements.
Treasury supply might play a role again with $113 billion in notes and $85 billion in bills set to settle next Monday, the final trading day of the third quarter.
Repo rates at quarter-end briefly fell to 2.50% before rising to about 4.00% on Tuesday.
(GRAPHIC: U.S. term repo rate – here)
Still, primary dealers were able to obtain overnight funding at below-market cost.
The stop-out rate on overnight repos backed by Treasuries at Tuesday’s Fed operation was 1.80%, while those on one-day repos backed by agency debt and mortgage-backed securities was 1.83%.
The N.Y. Fed will conduct overnight repo operations, worth at least $75 billion, every day through Oct. 10.
Reporting by Richard LeongEditing by Andrew Heavens, Nick Zieminski and Cynthia Osterman