Deutsche Bank predicts Fed will launch repo facility in early 2020
19 July 2019 Frankfurt
Image: Shutterstock
Deutsche Bank strategist Steven Zeng has predicted that the Federal Reserve could begin testing the repo facility later this year and launch it for full-scale operations in early 2020.
Zeng noted that this timing, however, could be complicated by a rate-cut cycle, especially if the Fed halts its balance sheet runoff and starts SOMA purchases earlier than anticipated.
He highlighted that in a hypothetical world only banks buy treasuries for liquidity coverage ratio purposes.
Meanwhile, if their demand and treasury supply are in equilibrium, treasury yields should collapse toward IOER and trade at a small positive spread to it, Zeng explained.
He added that this reflects the potential usage of the fed repo facility when banks pay a higher rate in exchange for temporary liquidity.
Given this dynamic, the repo facility should be bullish for shorter-date treasuries and spreads, Zeng revealed.
According to Zeng, the repo facility’s fixed rate will likely be set as a spread to IOER.
He concluded: “We [Deutsche Bank] think the Fed could initially set the fixed rate at a larger spread to IOER, potentially 35bp, opting for a more cautious approach.”
“We think primary dealers and banks will be in the set of eligible counterparties, but nonbanks will not. This also means that the repo facility may not be able to fully cap the month-end and quarter-end repo rate spikes."
Zeng noted that this timing, however, could be complicated by a rate-cut cycle, especially if the Fed halts its balance sheet runoff and starts SOMA purchases earlier than anticipated.
He highlighted that in a hypothetical world only banks buy treasuries for liquidity coverage ratio purposes.
Meanwhile, if their demand and treasury supply are in equilibrium, treasury yields should collapse toward IOER and trade at a small positive spread to it, Zeng explained.
He added that this reflects the potential usage of the fed repo facility when banks pay a higher rate in exchange for temporary liquidity.
Given this dynamic, the repo facility should be bullish for shorter-date treasuries and spreads, Zeng revealed.
According to Zeng, the repo facility’s fixed rate will likely be set as a spread to IOER.
He concluded: “We [Deutsche Bank] think the Fed could initially set the fixed rate at a larger spread to IOER, potentially 35bp, opting for a more cautious approach.”
“We think primary dealers and banks will be in the set of eligible counterparties, but nonbanks will not. This also means that the repo facility may not be able to fully cap the month-end and quarter-end repo rate spikes."
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
