NY Fed spends $53 billion to rescue the overnight lending market

RHANDP

Private
Messages
24
Anyone else miss this???

https://fox2now.com/2019/09/18/ny-fed-spends-53-billion-to-rescue-the-overnight-lending-market/

^^ That link will not work if you are in the EU. Spooky!

Why do I have to hear about this second hand?!!

FOX2now.comFOX2now.com | Joe Millitzer

NY Fed spends $53 billion to rescue the overnight lending market
Borrowing rates skyrocketed on Tuesday in a corner of the markets the public rarely notices but that is critical to the functioning of the global financial system.
The spike in overnight borrowing rates forced the New York Federal Reserve to come to the rescue with a special operation aimed at easing stress in financial markets.
It was the NY Fed’s first such rescue operation in a decade, the last occurring in late 2008.
“It’s unprecedented, at least in the post-crisis era,” said Mark Cabana, rates strategist at Bank of America Merrill Lynch.
. . .
 

Sive Morten

Special Consultant to the FPA
Messages
14,234
“It’s unprecedented, at least in the post-crisis era,” said Mark Cabana, rates strategist at Bank of America Merrill Lynch.

In general this is so-called tragedy is overestimated. In fact REPO trades have relation to short-term liquidity - mostly client payments execution, because this is most unknown factor, how much clients will pay/withdraw and how much they will get by operating day. It seems that Banks keeps all free liquidity in short-term Treasuries, which doesn't harm to mandatory bank ratios (normatives) as risk-free asset and gives some return. It seems that Banks a bit overdo with this, keeping too small free money on current accounts. I could miss something, but it was some big tax payments at this day or some other obligatory payments for corporation. Massive client payments triggers explosive demand for liquidity. Small banks have tried to borrow on bigger one using RePo (Repurchase Agreement) trades - this is when you sell the bond with obligation to buy it back on predefined day. Usually it lasts 1-7 days. 1-day is overnight Repo.

When bigger banks meet the same problem trying to borrow from Big whales such as JP Morgan, Fargo etc. - Fed comes on stage ,providing liquidity and taking all Treasuries collateral from big whales. Then this liquidity was delivered to smaller banks as well. This is typical situation.

High overnight rates is not something special. When I worked in interbank dealing, we could get rates 20% and even 40% in the morning, but they drop 2-3 times near the lunch time.

Despite this is is unique and not common issue for US, in global banking system, especially in emerging countries this is routine thing. And the fault is not on the Fed but on commercial banks' greed, as they can't keep a bit more on current accounts running for additional return. This is risk management, guys. They are too habbit to situation that rates are always low.
 

RHANDP

Private
Messages
24
Thanks Sive, for your analysis...

I am under the impression this happened again yesterday - however my news source is second hand because the UK media are not reporting these events, which as the article points out, have not occurred since 2008.

The most shocking aspect of this fiasco - the idea that such a fundamental process remains unreported over here.
 

Mazshura

Recruit
Messages
71
So what does that mean overall ? That we are on some shocking state of our economy or what ? Cause I am completely lost all together with all what we really have now. Do you see something like that or not ? I am kinda lost here and there.
 

Faelar

Private, 1st Class
Messages
65
Yes, such moments can fundamentally change the market position. And yes, it should be studied and analyzed.
 

Gholis

Recruit
Messages
16
Such news is always of great importance and it should always be taken into account when making decisions on the market...
 

Malsa

Private
Messages
29
I love such economic reviews, because it helps to act as objectively as possible.
And that's what helps you to act effectively and be a professional.
 
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