In what appears to be an orderly process, The NY Fed's first Reverse Repo operation since The FOMC 'raised' rates released $105.185 billion of Treasury collateral to 49 banks at a rate 25bps, draining the same amount of system liquidity.
This is being greeted as good news by many as no major disprutions appear to have occurred... aside from, of course, a 6bps plunge in long-end bond yields, 250 point drop in The Dow, and notable weakness in high-yield bonds. While some had feared up to $1 trillion would need to be withdrawn to achieve The Fed's goals, the size of this initial RRP suggests there is considerably less excess liquidty in the system than many would believe... indicating a notably more fragile system than we are being led to believe.
As we noted previously, two weeks ago, we cited repo-market expert E.D. Skyrm who calculated that moving general collateral higher by 25bps would require the Fed draining up to $800 billion in liquidity: "In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity."
And here is Skyrm's take on today's "historic" reverse repo announcement:
Remember all of the discussion about the massive liquidity sloshing around the financial system which would make it difficult for the Fed to raise rates? all of the economists and market pundits pricing OIS, Repo GC, LIBOR at the lower end of the new target range? Remember the Fed increasing the size of the RRP to about $2 trillion to accommodate the new target range? Well … never mind! Basically, the overnight market was "business as usual" today with fed funds opening at .35%, GC Repo averaging at .414% and today's RRP volume at $105 billion, up only $3 billion from yesterday. In addition, GC to December 31 is trading at .45%, implying the Repo market expects rates to stay at these levels between now and year-end.