Fed’s $200 billion effort holds down repo rate at quarter-end

NEW YORK (Reuters) – An extra $200 billion in cash available to the U.S. banking system on Monday thanks to injections by the Federal Reserve kept a lid on short-term borrowing costs at end of the third quarter, preventing a replay of the chaos that hit money markets nearly two weeks ago.

Traders and analysts had speculated whether the liquidity the U.S. central bank has provided through primary dealers would be enough of a buffer for the $2.2 trillion repurchase agreement market at a critical time when banks and Wall Street often scramble for cash.

“It seems to be fairly well contained so far,” said Gennadiy Goldberg, U.S. senior interest rates strategist at TD Securities in New York.

On Monday, the Fed pumped $63.5 billion in cash via overnight loans to primary dealers, or the top 24 Wall Street firms that do business directly with the Fed.

This move was on top of the $139 billion in 14-day cash the Fed also put in the system last week.

Overnight repo rates opened early Monday at 2.50%-2.80%, compared with 1.90% late on Friday, according to ICAP.

They fell to 1.70%-1.95% in mid-afternoon trading.

On Sept. 17 during the market turmoil, overnight repo rates jumped to 10%, which had not been seen since the height of the global credit crisis in 2008.

The central bank is scheduled to conduct daily repo operations where primary dealers can bid for loans from the Fed with Treasuries and other bonds as collateral through Oct. 10.

On Monday, it announced it would offer up to $75 billion in overnight repos on Tuesday, down from the aggregate limit of $100 billion on Monday.

Goldberg said the Fed may consider prolonging its repo schedule until it decides whether to launch a standing repo facility or increase its balance sheet through Treasury purchases, or both.

Morgan Stanley analysts forecast the Fed may buy $315 billion in Treasuries over a six-month span beginning on Nov. 1 to try to rebuild bank reserves and avert the turmoil that hit money markets.

Boston Fed President Patrick Harker said on Friday discussions about a standing repo facility are in their “infancy” and that more work needs to be done to determine how such a program would be designed.