Fed Repo Oversubscribed For Third Day But Total Drops As Funding Pressures Ease

There was some bad and some good news in today's, 4th consecutive repo operation conducted by the NY Fed.

First, the bad news is the for a 3rd consecutive day, the total amount of securities submitted for "liquification" at the Fed was greater than the total size of the Fed's $75 billion repo facility, meaning it was once again oversubscribed.

However, the good news is that whereas yesterday the total securities "parked" into the repo op was $83.875 billion, on Friday, the total dropped to just $75.55 billion, meaning the facility was oversubscribed by just $550 million, down sharply from Thursday's $8.875 billion.

Some other observations: whereas yesterday the amount of MBS submitted into the repo was $26.15BN, today this number dropped to just $15.35 billion at a stop-out rate of 1.81%, down from 1.85% yesterday. This, however, was offset by an increase in Treasurys submitted, which rose from $56.325BN to $59.6BN at the same stop out rate of 1.80%.

The bottom line is that funding tensions are clearly easing, although pockets of illiquidity remain, which can also be observed by the repo rate which earlier today opened at 2.00% before dipping to 1.90%, which however was higher than Thursday's close of 1.725%. A better picture was painted by the SOFR rate, which dropped from 2.55% on Thursday to just 1.95% today (and down from an all time high of 5.25% on Wednesday).

Is this to be expected? Why yes: as we noted yesterday, even Goldman now expects that the Fed will resume QE, pardon, POMO, or bond purchases in November, with Goldman expecting the Fed to start purchasing roughly $15bn/month rate of permanent OMOs, "enough to support trend growth of the balance sheet plus some additional padding over the first two years to increase the size of the balance sheet by $150bn, restoring the reserve buffer and eliminating the current need for temporary OMOs." That strategy would result in balance sheet growth of roughly $180bn/year and net UST purchases by the Fed (the sum of the red and grey bars) of roughly $375bn/year over the next couple of years.

In other words, with just 3 days of turmoil in the repo market, in just two months traders will successfully push the Fed to restart QE (assuming Goldman is right).

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So now what? "While next week’s dealer balance sheet data may help uncover what contributed to this week’s fund market meltdown, it may take a long time to complete the post-mortem,” Wrightson ICAP strategist Lou Crandall wrote today. It was known that the tax-date decline in the supply of reserves would “take us into entirely new territory,” but there’s nothing in the data that explains why “such an unbridgeable gap” between supply and demand for funds in the repo market opened up.

"The bottom line is that we still don’t know what turbo-charged the market’s funding problems on Monday."

Which is an odd statement for the world's largest interdealer broker, considering just a quick scan of fintwit will demonstrate that some of the loudest voices are absolutely confident they know everything that happened, and that there is no reason to be worried any more.