Here we go. The morning was terrible and the afternoon still looks grim, but the Fed is back as a buyer of last resort. If anyone out there needs liquidity, they're covered.
The New York Fed took the lead as part of the usual repo cycle. This time around, $500 billion is available "to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak."
Rumor has it people had started dumping muni bonds when they couldn't find anything else liquid in the credit market. That's serious stuff that reveals that the pall of viral uncertainty is on the verge of turning into institutional paralysis.
The banks don't want to trade. They definitely don't want to lend. Mortgage rates are getting a little ragged as some underwriters grab cash while they can while others won't lend at any price.
We've seen something like this before. We lived through it. So did the people at the Fed. They have zero desire to live through it again.
So far, the $500 billion vote of confidence has stabilized the stock market about 3% off its morning lows, but it might take a trip back to zero interest rates to really establish the floor.
After all, the next formal FOMC statement isn't until next Wednesday. That might be too long for some people to wait. We'll keep you posted. You have plenty of information at hand. But for now, here's the NY Fed statement:
The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released a new monthly schedule of Treasury securities operations and has updated the current monthly schedule of repurchase agreement (repo) operations. Pursuant to instruction from the Chair in consultation with the FOMC, adjustments have been made to these schedules to address temporary disruptions in Treasury financing markets. The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities. Term repo operations in large size have been added to enhance functioning of secured U.S. dollar funding markets.
- As a part of its $60 billion reserve management purchases for the monthly period beginning March 13, 2020 and continuing through April 13, 2020, the Desk will conduct purchases across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. Specifically, the Desk plans to distribute reserve management purchases across eleven sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes. The distribution of purchases across sectors will be the same distribution as the Desk uses to reinvest principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in Treasury securities. The first such purchases will begin tomorrow, March 13, 2020.
- Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020. Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule. The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.
These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak. Reserve management purchases into the second quarter will continue to be conducted with this maturity allocation. The terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation.
