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Monday, November 26, 2007

Fed Year-End Repo

A lousy 8 billion? Needs more than that:
The New York Federal Reserve will arrange $8 billion of long-term repurchase agreements, or repos, in a bid to hold down banks' borrowing costs through year-end.
The New York Fed said in a statement that it will arrange the first of the long-term repo operations on Nov. 28 ``in response to heightened pressures in money markets for funding through the year-end.'' The repos will mature on Jan. 10. The Fed also said that it plans to ``provide sufficient reserves to resist upward pressures'' on the overnight rate in coming weeks.
So as we lurch into the yearend, the Fed stands ready to help to try to keep overnight rates close to the official Fed funds rate. Fed funds rate cut apparently will be deferred until January. The lending guidelines for borrowing on Treasuries are also being eased:
In a separate statement, the Fed said it will raise the limits on the amount of Treasury securities dealers can borrow from its System Open Market Account. Through the account, dealers can borrow Treasury notes and bills that are scarce in the repo market.

Primary dealers will be able to borrow 25 percent of the amount available, with a maximum of $750 million per Treasury security, up from the previous limit of 20 percent with a maximum of $500 million per issue, according to the Fed's statement.

The Fed said it has also increased the amount available for borrowing each day to 90 percent of an issue from 65 percent. Dealers can also borrow securities maturing in six days or longer. The Fed had previously limited the borrowing only to issues maturing in at least 13 days.

What the Fed did today is a big deal. The 60% to 90% move frees up a lot of stuff. The 8 billion is just the tip of the iceberg. I predict the funds rate on 12/31 will end up being below 1%, probably even zero.

And it was arrainged with the ECB. They're on it as well.

The SIV stuff, however is far from over.
Yes, we are in liquidity crisis Mark II, the new and improved version. Three or four times the power, and twice the acceleration. That's what I meant about the "needs more than that".

You could be right about the rate because this looks like thin ice.
Who needs the fed when you've got FNM, FRE & the FHLB?
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