G.C. / Fed Funds Spread Back to Normal
The general collateral market crashed and the GC/fed funds spread is no longer a spread. Great success for the TSLF [ so far...read on ]
Term collateral rates are adjusting higher to reflect a narrower GC/fed funds spread.
The market will remain awash in collateral until the “seasonal collateral shortage” hits the middle of the month. And then..between April 15th and April 24th, a net total of $158.6 billion U.S. Treasurys will mature and leave the market.
Note: this is twice the size of the successful TSLF auction last Friday. However, there can be more TSLF auctions in the future. The total size of the program is $200 billion.
So the Fed has another $125 bill Treasurys which can be added to the market. The Fed announced a $25 billion auction for tomorrow for schedule 1 collateral.
But the question is: will there be upcoming TSLF auctions ? If so, will they be large enough to offset the pending “collateral shortage.”
Thx Stan J.
April 3rd, 2008 at 11:06 am
[...] Is there a pending “collateral shortage“? (Alea) [...]
April 3rd, 2008 at 12:38 pm
jck — your opinion please, is this related to what I just posted about?
http://alephblog.com/wp-admin/post.php?action=edit&post=631
There have been a lot of low Fed funds trades of late, and though I didn’t write about it in my piece, could that be connected to low repo rates? I’m still learning the repo market, so if this is a dumb question, please bear with me… Thanks.
April 3rd, 2008 at 1:05 pm
David:
With all the new creative interventions/facilities that we have seen recently, I suggest we need to be very careful about reading too much on the fed funds level. The market is still unsettled by the new tactics. Normally you would expect fed funds to trade higher than repos on high grade collateral, because they are unsecured loans vs collateralized loans. This is a bit broken at times. What the Fed has tried to do, I think, is to close the gap between repos rates for treasuries and fed funds that had become very wide and so far, success…
April 5th, 2008 at 12:21 pm
The FOMC targets the federal funds rate, nominally the rate banks charge each other on overnight loans of deposits at the Fed.
In fact, what the NY Open market Desk SETS EACH DAY IS THE ONE-DAY REPO RATE ON TREASURIES, that is, the one-day cost-of-carry on government bonds.
This is the TRUE POLICY INSTRUMENT — and it affects huge amounts of money (essentially, the one-day return on all government securities), while fed funds transactions daily, in comparison, are a trivial amount.