US Repo Seizure After 10 Months... Fed Gradually Withdrawing 'Liquidity Supply'

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Major foreign media reported on the 8th (local time) that the U.S. Federal Reserve (Fed), which intervened in the short-term funding market and supplied liquidity following the repo (repurchase agreement) short-term rate spike in September last year, has begun to gradually withdraw after 10 months.

According to Bloomberg News, the New York Federal Reserve Bank, responsible for the Fed's open market operations, did not conduct repo transactions for two consecutive days on the 7th and 8th in the repo market. This is the first time since the Fed intervened in the market after the short-term rate surged on September 17 last year that the transaction volume dropped to zero.

The New York Fed began actively intervening in the repo market by purchasing bonds starting with $53.2 billion on September 17 last year. At that time, the overnight short-term borrowing rate temporarily spiked to as high as 10%, showing signs of a sudden shock, prompting the Fed to supply liquidity. Although the rate later fell to the 2% range, it remained unstable.

The Fed increased the transaction volume to about $260 billion per day by the end of last year. As the repo market showed signs of stabilization, it reduced the volume to around $100 billion early this year. However, with the onset of the COVID-19 outbreak in the U.S., the intervention volume sharply increased in early March, reaching $495.7 billion on March 17. The New York Fed, which has been adjusting the intervention volume according to market conditions, has not conducted any transactions since purchasing $53.2 billion of 28-day maturity bonds on the 6th.

Regarding this, Scott Skum, a repo trader and vice president at Coverthur Securities, described it as an "important moment" signaling that the market is returning to normal. John Hill, a rate strategist at BMO Capital, stated, "The fact that the Fed is slowly and gradually withdrawing means that the funding market has significantly normalized since March and that the Fed wants to leave a smaller footprint than necessary." Foreign media reported that the current overnight rate is hovering around 0.13%.