Investors clamoured on Monday to secure financing over the end of the year, snapping up $25bn of short-term loans offered by the US Federal Reserve in an attempt to insulate themselves from a potential spike in borrowing costs.
The New York branch of the Fed has been offering loans in the repo market since an alarming jump in overnight borrowing costs there in September. Monday’s operation was the second to offer financing across the potentially illiquid year-end period.
Demand reached almost twice the available funds on offer at $42.6bn. The first such term-repo operation — where the markets arm of the Fed offers cash in exchange for high quality collateral like Treasuries and mortgage bonds — last week received $49bn in orders for the $25bn on offer. There remains one more operation next Monday that will provide $15bn in financing beyond the December 31 crunch date.
“There is a lot of demand to lock up funding going into year-end,” said Jon Hill, an interest rate strategist at BMO Capital Markets.
Analysts and traders said they expected the high demand to result in the Fed increasing the size of the third operation next week.
“It’s all in the Fed’s hands right now,” said Scott Skyrm, a repo trader at Curvature Securities. “The market will be very disappointed if they see the Fed still come in with a $15bn operation.”
The average interest rate paid to borrow the cash from the US central bank over year-end was 1.62 per cent on Monday, down from last…