Repo Shrinkage Begins In February: That's When Fed Cuts Each Term Repo By $5 Billion

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by Tyler Durden
Tuesday, Jan 14, 2020 - 03:20 PM

With everyone (grudgingly or otherwise) now admitting that the Fed's repo and QE4 was responsible for the miraculous surge in stocks since the start of Q4 2019, traders were especially focused on today's release of the next monthly schedule of repo operations to see if the Fed would, as Powell hinted, start reducing the liquidity injection via repo. And sure enough, that's precisely what happened when the NY Fed announced that starting February, the term repo, which had been kept constant at a level of $35 billion since mid-December, would be reduced by $5 billion to $30 billion for every new term repo.

As shown in the latest schedule below, the New York Fed announced that overnight repos would remain at their prior limit of "at least $120 billion", but it was the term repos where the Fed confirmed that the massive liquidity glut triggered by JPMorgan the Sept repo crisis would finally being to taper, starting with the Feb 4 two-week term repo, which would decline from $35BN to $30BN.

As for the rest of January, the Fed will conduct four more term ops of up to $35 billion each. That, according to Curvature's Scott Skyrm, means as much as $140 billion coming back into the market to replace $132 billion rolling off. Once we hit February, there will be four more term ops of $30 billion each to replace the January ops rolling off.

In the aggregate this is a modest drop, reducing overall liquidity by just $20 BN over the month of February as existing repos roll into smaller operations, but assuming there are no incidents, one assumes that in March (and then April, and May), the shrinkage will continue apace, with the total amount declining by a similar or greater amount.

As Skyrm points out, "it looks like the Fed is in no hurry to wean the Repo market off easy Fed cash. At the current rate of decline, four operations in March will be $20 billion each, four in April at $15 billion each, four in May at $10 billion each, June at $5 billion each, and none beginning in August. Clearly there is no indication that the Fed RP operations are ending anytime soon."

Or as Skyrm concludes, "you would think another year-end is about to occur again. Basically there is no indication that the Fed will end RP term operations anytime soon. In fact, at the current pace, the ops should end sometime in August."

Of course, on net the total liquidity will actually increase as in February the Fed will inject at least $60BN in liquidity via T-Bill monetizations courtsy of "NOT QE 4", and then another $60BN in March, then April and so on. In other words, while there Fed confirmed a modest repo shrinkage starting in two weeks, this will be more than offset by permanent open market operations which will see the Fed continuing to grow its balance sheet, in the words of UBS, "indefinitely."