The increasing dysfunction of the US Treasury market, possibly caused by total “flight to cash”, forced the Fed to intervene with a rather strong countermeasure – announcing $ 1.5 trillion liquidity injection through 1-month and 3-month repos. The market has been already offered $ 1 trillion on Thursday and will be offered another $ 500 billion today. According to NY Fed, which conducts regular 1-month and 3-month repo operations will continue at least until April 13. More and more, it looks like the launch of QE4.
Surprisingly, Thursday data on demand for liquidity showed that its shortage wasn’t the only issue as dealers submitted collateral for only $ 78.4 billion from the limit of $ 500 billion:
There is also the possibility that sharply increased repo limit rather played the role of “almighty Fed” signal function.
Thursday repo also failed to dampen the spike in well-known indicator of credit and liquidity risk in the banking sector – the spread between Libor and OIS rates. Libor is the interbank rate for unsecured loans (which implies there should be some premia reflecting credit risk), OIS rate is the rate in fixed leg of interest rate swap (literally 0 credit risk in OIS contract since the parties exchange only interest payments). The widening spread between these rates should reflect an increase in credit risk. In 2008, with the collapse of Lehman Brothers the spread reached 83 bp. On Thursday it rose to 67 bp., however the massive repo brought only temporary relief to it:
Source: Zero Hedge
Stock markets posted tepid response to the “remedy” from the Fed, extending deep correction.
All three market responses, i.e. demand for liquidity in repo operations, stock market fall and the unstable effect in the Libor-OIS spread form expectations of wider support at the March meeting, which include even such radical scenarios as a cut in federal funds rate by 100 basis points or resumption of QE from which the Fed tries to avoid despite the great resemblance of regular repo operations with it. The primary focus on Fed action is also based on unconvincing stimulus pledge from president Trump (more tax cuts), since it is obvious that Democrats’ refusal to cooperate should have political damage for the president, i.e. point to his “helplessness.” In line with these expectations, the prospects for stronger dollar at the beginning of next week are likely to be very limited.
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