In response to this spike in overnight borrowing rates, the Federal Reserve used open market operations to inject more cash into the banking system. Most people think this disruption was an isolated or idiosyncratic event, but the last time the Fed conducted liquidity operations of this sort was during the financial crisis. Therefore, this week’s activity has caused some questions and concern. However, unlike in 2008, the banks appear to be in sound financial shape and there has been no accompanying widening of credit spreads to ring alarm bells.
The good news is the Fed stabilized repo rates and will to continue inject liquidity as needed. But, why did overnight funding rates jump up in the first place?
While no one knows for sure, the funding stress is likely related to particularly large cash needs this past week. Corporations and individuals needed cash for tax payments at the same time that U.S. Treasury dealers needed to finance their Treasury auction positions. Further, since 2017, the Fed has followed a path of reducing excess liquidity in the financial system, and perhaps it’s tightened too much. Given the increased issuance of Treasury securities to fund increasing levels of US debt, it seems like more liquidity will be needed going forward.
Fed Chairman Powell has stated they will take measures to prevent these kinds of disruptions in the future, including regular open market operations, offering longer term repos, and potentially increasing the size of the Fed’s balance sheet.
Nothing contained herein is intended to be a formal research report, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which any accounts should be handled. Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such. Investing involves risk, including loss of principal, and no assurance can be given that a specific investment objective will be achieved.
2x Wealth Group is a team at Ingalls & Snyder, LLC.,1325 Avenue of the Americas, New York, NY 10019-6066. (212) 269-7757
We never really know where markets and the economy are headed, but market participants constantly look for clues.
Why does the current market tone feel different from the February and March stock market selloffs?
When do they protect you? When do they hurt you?
The 10-year US Treasury bond bottomed in July of 2016. Since then, the interest rate on the 10-year has more than doubled from 1.39% to 2.9%.
Worst Day Ever for the Dow Jones Industrial Average!
Perspective As the current bull market ages (from the bear market end in March 2009) investors are increasingly worried about buying at the peak.
The basic difference between a mutual fund and an exchange traded fund (ETF) is that an ETF trades like a common stock as its price changes throughout the trading day.
Brexit is spurring a flight to quality move into US Treasuries.
The short answer is yes.