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Reuters
6 days ago
- Business
- Reuters
New York Fed to start morning Standing Repo Facility operations next month
May 28 (Reuters) - The Federal Reserve Bank of New York said Wednesday that late next month it will add morning offerings for its liquidity providing Standing Repo Facility. The morning Standing Repo Facility, or SRF, operations will join with existing afternoon operations, and will be available starting June 26. "The additional daily morning SRF operations are intended to further enhance the effectiveness of the SRF in its ability to support the effective implementation of monetary policy and smooth market functioning," the bank said in a statement. The SRF was launched in 2021 in a bid to bolster the central bank's ability to provide liquidity to the financial system. It also helps the Fed keep the federal funds rate, its chief tool for influencing the course of the economy, in line with levels targeted by the rate-setting Federal Open Market Committee. The SRF takes in Treasury and agency securities from eligible firms in exchange for fast cash loans, and essentially makes available on a constant basis liquidity once provided by discretionary Fed repo operations. The tool has essentially gone unused through its lifespan with the exception of modest usage at the end of the third quarter last year, when money markets navigated a short-lived period of stress. Roberto Perli, the New York Fed official responsible for implementing monetary policy for the central bank, had been noting that morning operations would join those offered in the afternoon. "This will be an important step in enhancing the efficacy of the facility," Perli said last Thursday, and a more effective SRF could also allow the Fed to shrink its holdings of bonds by more than would otherwise be the case. He also nudged reluctant financial firms to tap the SRF, saying "I encourage our counterparties to use the SRF when it makes economic sense." The morning SRF availability will kick off on June 26, with the cadence of afternoon operations remaining as they are now. In a statement, the New York Fed said that it will cap total daily SRF operations at $500 billion. The closing time for the morning operations will be 8:30 a.m. ET. Early SRF operations have already been deployed around year and quarter ends, and while they have gone unused, some believe their availability helped bolster market confidence around periods that can be volatile in money markets. The New York Fed's SRF announcement followed closely on the heels of the release of minutes from the Fed's meeting minutes covering its early May Federal Open Market Committee meeting. The minutes weighed in heavily on the unsettled financial conditions that abounded in the run up to that gathering, spurred on by President Donald Trump's global trade war. While stress was real and broad based during that period, the minutes noted that Fed staff as well as policy makers saw orderly trading amid the tumult. Fed officials also signaled some concern on valuation levels in markets. The minutes also touched on the SRF, and noted "market outreach indicated that dealers had a higher willingness to use the facility when early settlement was offered." The minutes also said some Fed officials believed that a move to central clearing for the SRF might bolster usage in times of trouble. The looming launch of early SRF operations may not change much for now, however. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York, said "usage of the regular afternoon SRF currently stands at zero and we don't expect SRF usage to increase simply because of the added operation." "During times of stress, conducting twice daily operations will be helpful in helping to backstop markets," Goldberg said, adding "there will probably still be some stigma in using the facility, which is something the Fed has been battling against in recent years, but the additional operation should eventually prove helpful." Stigma issues have dogged parts of the Fed's lending operations for some time, because many financial firms believe that tapping central bank cash, even when encouraged to do so by central bankers, signals weakness. Stigma issues have been most acute for the Fed's Discount Window lending facility for deposit taking banks, but some have said these concerns extend to the SRF as well.
Yahoo
22-05-2025
- Business
- Yahoo
Fed's Perli encourages firms' use of Standing Repo Facility
By Michael S. Derby NEW YORK (Reuters) -A Federal Reserve Bank of New York official responsible for implementing monetary policy said on Thursday the central bank is encouraging usage of a key liquidity tool that thus far has been largely dormant. When it comes to the Standing Repo Facility, or SRF, "I encourage our counterparties to use the SRF when it makes economic sense - the facility is there to support the effective implementation of monetary policy and smooth market functioning," said Roberto Perli, who manages the central bank's System Open Market Account, in the text of a speech prepared for delivery at a conference held by his bank. "It's in everyone's best interest if the SRF works as intended," Perli said. The Fed's SRF was launched in 2021 and provides eligible firms with fast cash in exchange for Treasury securities, in a bid to bolster market liquidity and avoid unexpected shortfalls that can be hard for the central bank to counter expeditiously. Thus far, markets, still flush with liquidity, have largely left the SRF alone outside of the end of the third quarter last year, a short period of volatility. Perli reiterated in his remarks that fairly soon the New York Fed will join its afternoon SRF operations with a morning availability. "In the not-too distant future," the New York Fed "will start implementing daily morning SRF operations that will also be settled in the morning," Perli said. "This will be an important step in enhancing the efficacy of the facility, and, at the margin, it can contribute" to allowing the Fed's balance sheet to be smaller than it would otherwise be. Perli is responsible for implementing monetary policy for the central bank, both in terms of the management of its short-term interest rate target and its massive holdings of cash and bonds. Perli noted in his remarks that the ongoing contraction of the Fed's balance sheet, which has seen the central bank shed just over $2 trillion in Treasury and mortgage bonds, likely has some ways to go, although there are signs of tightening money market liquidity. As Fed holdings shrink and reserve levels move down, "upward pressure on money market rates is likely to increase," Perli said, adding "we are starting to see the early signs of this in the repo market, especially around key reporting dates." This rise in repo market chop "is not a cause for concern," Perli said. But he also noted that it's likely to increase the need for markets to use the SRF to manage their liquidity needs. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Business Mayor
09-05-2025
- Business
- Business Mayor
It was remarkably resilient repo wot won it
Unlock the Editor's Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. How bad was the Treasury market turbulence last month? It was 'real and significant' and 'unnerving', but it wasn't chaotic or even 'exceptional' — thanks largely to funding markets remaining remarkably durable. That's the conclusion of Roberto Perli, the manager of the New York Federal Reserve's System Open Market Account, who gave an interesting speech on the subject today. A word of warning. This was initially supposed to be a quick write-up of a speech on a timely topic, but soon became a bit of an opus. If things like IORB, MMFs, ON RRP and SRF make you want to self-harm, then please leave and enjoy your weekend. But this stuff is pretty important — and interesting! — so we hope you stick around. As you may have read here and elsewhere, Treasuries went a bit weird last month, sinking alongside everything else. No one likes that. After all, Treasuries are supposed to be the world's best haven when everything else is looking sickly. However, as Perli noted, while the US government bond market's liquidity deteriorated sharply in mid-April, it still continued to function. That is a sharp contrast to what we saw in March 2020, when the Treasury market nearly completely froze. This is obviously largely because Covid-19 was a far bigger economic and financial shock than President Donald Trump's 'liberation day'. But it is also just as much because 'funding liquidity remained plentiful', according to Perli: . . . Although liquidity in Treasury cash markets became strained in early April, those markets continued to function, in part because of the resilience of funding liquidity in the Treasury repo market. That resilience, even amid heightened yield volatility, likely prevented the unwind of certain shorter-term relative value trades, which would have exacerbated market dislocations. And funding liquidity resilience was likely helped by the robust rate control framework that the Federal Reserve has put in place. For example, although Perli reckons the swaps spread trade unwind had a big impact on Treasuries, he argues that the now-infamous basis trade was the dog that didn't really bark. While the Treasury basis trade stood at an estimated $1tn at the end of March 2025 — much bigger than when it caused carnage in March 2020 — there was no massive forced unwind this time because repo markets remained calm: One factor that could lead to a rapid unwind of the basis trade is substantial repo rate volatility or a persistent increase in repo rates, which could in turn increase the cost of financing the position and therefore make it unprofitable. But this by and large did not happen in April since repo rates were fairly stable and dealers remained willing and able to intermediate. As a result, according to Desk staff's estimates, the basis remained relatively stable. This stands in sharp contrast to March 2020, when the basis jumped by about 100 basis points and the unwinding of basis trades was likely an important contributor to the sharp dislocation in the Treasury market we observed at that time. Here we want to shoot in a pedantic point, because the pendulum has probably swung too far from blaming the basis trade for every ill that afflicts markets to exonerating it completely from absolutely everything. Just because repo markets were resilient and the basis between cash Treasuries and Treasury futures remained reasonably stable, it doesn't necessarily mean that at least some hedge funds didn't ratchet back their basis trades when volatility spiked. Alphaville knows of at least one hedge fund that pretty much got out of the trade in early April, and has heard enough colour from prime dealers and buyside traders to conclude that there really were some chunky basis trade unwinding going on. It was just controlled and orderly. Read More China's real intent behind its stimulus inflection Anyway, Perli rightly points out that this shows just how vitally important short-term funding markets are to the US government bond market, because of the growing importance of highly leveraged hedge fund strategies. When funding liquidity remains stable, as it did in early April, it is less likely that a deterioration of market liquidity will spiral into market dysfunction. This is because market participants can still finance their transactions, and arbitrage does not break down. In other words, because of the widespread presence of leveraged investors in the Treasury market, funding liquidity reinforces market liquidity. So what does this all mean? Well, the Federal Reserve's toolkit to influence money markets is even more important these days. Or as Perli puts it: Funding liquidity is more likely to remain plentiful if money market rates are not too volatile, which, in turn, depends on the availability and efficacy of monetary policy implementation tools for ensuring rate control within the Federal Reserve's ample reserves framework. One of those tools is the overnight reverse repo facility — or ON RRP among friends. ON RRP allows money market funds and other important short-term funding market players to park money at the Fed. It is (along with interest on reserve balances), one of the main tools used to control interest rates in the abundant reserve era. But the main one that Perli discussed today was a newer one called the Standing Repo Facility. This is a permanent and powerful programme that lets banks use Treasuries and agency debt as collateral for short-term loans, and came after a big repo blow-up in 2019. Although priced a little higher than where the Fed sets interest rates, there's less of a stigma attached than hitting up the discount window. And because banks can also use the facility on behalf of clients, such as money market funds, it's a great way of dampening repo market pressures. Perli's team now wants to strengthen the SRF to make sure it can continue to ensure that funding markets remain well-behaved. In March, the NY Fed began testing early morning settlements alongside the existing afternoon settlements, and these seem to have gone well: Our market outreach following the March quarter-end revealed that primary dealers see the early-settlement SRF operations as an enhancement that increases the likelihood that the SRF will be used when economically convenient to do so. This is especially true for non-U.S.-bank-affiliated primary dealers, though this group is relatively small and accounts for only about a tenth of primary dealer repo borrowing. Dealers also reported that early settlement lowers hurdle rates — that is, the rate in excess of the SRF rate they are willing to pay in the market before choosing to access the SRF. This is all encouraging feedback. Based on it, the Desk plans on making early-settlement SRF auctions part of the regular SRF daily schedule, at some point in the not-too-distant future. These early-settlement auctions, combined with the current afternoon auctions, will enhance the effectiveness of the SRF as a tool for monetary policy implementation and market functioning. That's all good stuff, but tbqh Alphaville doesn't feel entirely comforted by the fact that the health of the world's biggest and most systemic market increasingly rests on short-term funding conditions, given how fickle money markets can be. We also have some very specific issues with the SRF — but that will have to be a matter for a future post. Further reading: — How the Treasury market got hooked on hedge fund leverage (FT) — Recent Developments in Treasury Market Liquidity and Funding Conditions (NYFRB)
Yahoo
07-03-2025
- Business
- Yahoo
NY Fed's Perli says market liquidity levels remain abundant
By Michael S. Derby NEW YORK (Reuters) - A Federal Reserve Bank of New York official who manages the implementation of monetary policy indicated Wednesday the central bank has room to further shrink its balance sheet, while noting government financial management issues will create challenges for the process over the short run. Market indicators 'are telling us that reserve conditions are currently abundant, as they have been for quite some time,' said Roberto Perli, who manages the Fed's System Open Market Account, its portfolio of bonds, cash and other assets, which currently stand at $6.8 trillion. He spoke before a gathering of the Money Marketeers of New York University. Perli's comments suggest that all else being equal, there's no imminent need to end the contraction of Fed holdings known as quantitative tightening, or QT. But with that said, there are some imminent challenges the Fed must navigate. After more than doubling the size of its holdings due to efforts to bolster the economy during the COVID-19 pandemic, since 2022 the Fed has been allowing Treasury and mortgage bonds it owns to expire and not be replaced, which has allowed the central bank to trim just over $2 trillion from its holdings. The Fed is trying to remove just enough liquidity from financial markets to allow for normal money market volatility and to preserve its strong control over the federal funds rate, its chief tool to achieve its monetary policy goals. The challenge for the Fed is that it is unsure where the stopping point for the drawdown rests. Further complicating matters is unsettled government financial needs and a debt ceiling that limits borrowing. The Treasury's effort to manage that situation is likely to lead to unsettled money market conditions, and as a result, Fed officials are contemplating slowing or temporarily pausing QT until more clarity arrives. 'The longer balance sheet runoff continues while the debt ceiling situation persists, the higher the risk that, upon the resolution of the debt ceiling, reserves could rapidly decline to levels that could result in considerable volatility in money markets,' Perli said, while not tipping his hand as to what he expects to happen with QT. Speaking on Tuesday, New York Fed President John Williams said 'our strategy hasn't changed' and the endgame for QT remains in place. Slowing or pausing QT, if either happens, allows the Fed to 'make sure' it doesn't go too far with the drawdown and take out too much liquidity from financial markets, he said. In his remarks, Perli also said he expects that the Fed's overnight reverse repo facility can further shrink, while adding it's possible the central bank will add morning Standing Repo Facility operations at the turn of the next quarter, as it did at year's end. Perli also said repo market conditions, where banks and others borrow and lend bonds and cash, continue to normalize. Sign in to access your portfolio
Yahoo
06-03-2025
- Business
- Yahoo
Debt-Limit Dynamics Could Disrupt Money Markets, Says Fed's Perli
(Bloomberg) -- The current debt-ceiling impasse could threaten the Federal Reserve's ongoing balance-sheet runoff causing gyrations in the central bank's liabilities that create volatility in money-market rates, according to Federal Reserve Bank of New York's Roberto Perli. Republican Mayor Braces for Tariffs: 'We Didn't Budget for This' Trump Administration Plans to Eliminate Dozens of Housing Offices How Upzoning in Cambridge Broke the YIMBY Mold NYC's Finances Are Sinking With Gauge Falling to 11-Year Low Remembering the Landscape Architect Who Embraced the City Once the debt ceiling is resolved the Treasury Department tends to rapidly rebuild its cash pile — the biggest liability on the Fed's balance sheet — resulting in a fast decline in other liabilities. This may especially affect bank reserves since the overnight reverse repo facility is 'largely depleted,' Perli, who oversees the central bank's securities portfolio, said Wednesday at an event hosted by the Money Marketeers of New York University. 'The longer the balance-sheet runoff continues while the debt ceiling situation persists, the higher the risk that, upon the resolution of the debt ceiling, reserves could rapidly decline to levels that could result in considerable volatility in money markets,' Perli said. A key House Republican said Wednesday the US could hit the debt ceiling as soon as mid-May, earlier than estimates from Wall Street strategists. The level of outstanding US debt hit its statutory limit in January. The Treasury has since been using special accounting maneuvers and drawing down its cash reserves to prevent a payments default. For several months officials said very little publicly about when they might stop reducing the Fed's balance sheet, a process known as quantitative tightening, or QT. However, minutes of the January Federal Open Market Committee meeting revealed policymakers had discussed the potential need to pause or slow the process until lawmakers can strike a deal over the government's debt ceiling. Repo Pressures Perli, who runs the System Open Market Account, said indicators are showing that reserve conditions are still abundant, noting that it's not clear at what point reserves will become scarce. Perli, however, acknowledged that the repo market — a bellwether for showing that quantitative tightening has gone too far — pressures have been gradually increasing, citing the increased share of interdealer market transactions taking place above the interest rate on reserve balances, which is 'notably higher than it was this time last year.' The Fed has been shrinking its holdings of debt since June 2022. It's currently allowing up to $25 billion in Treasuries and $35 billion in mortgage-backed securities to mature each month without reinvesting the returned principal. It slowed to that pace in June, after initially allowing up to $60 billion in Treasuries to run off its balance sheet each month. Minutes from the January gathering also showed that policymakers were briefed on possible ways to structure secondary-market Treasury purchases after the end of the balance-sheet runoff. Many officials expressed support for structuring purchases in a way that moved the portfolio's composition closer to that of outstanding Treasury debt. Currently, the SOMA Treasury portfolio is 'significantly underweight' bills and 'significantly overweight' coupon securities with 10 to 22.5 years remaining to maturity, according to Perli. He suggested the discrepancy could be addressed by allocating secondary-market purchases to T-bills, yet at a gradual pace in order to avoid impacting the markets, though this would likely take a number of years. Portfolio Composition Federal Reserve Bank of Dallas President Lorie Logan, a former SOMA manager, said last week it would be appropriate, in the medium term, for the US central bank to purchase more shorter-term securities than longer-term ones so that its portfolio can more quickly mirror the composition of Treasury issuance. 'The strategy I just sketched does not lock policymakers into a particular portfolio structure for the longer term — it just moves the SOMA portfolio toward a more proportionate composition in the nearer term,' Perli said. 'In the future, the committee will have the flexibility to adjust and achieve any desired portfolio composition to best support its policy objectives.' On the Standing Repo Facility, Perli acknowledged that the addition of a morning operation on the days spanning the end of the year may have contributed to a relatively smooth conclusion to 2024 in the funding markets. He also said there's a chance the New York Fed could offer a technical exercise at the end of March, another period when short-term rate markets tend to be volatile. According to the latest FOMC minutes, several Fed officials supported looking for ways to improve the efficacy of the Standing Repo Facility. The New York Fed has been conducting a series of small-value exercises to take place at the beginning of the trading session. (Updates with background on debt-limit in fourth paragraph.) The Mysterious Billionaire Behind the World's Most Popular Vapes Rich People Are Firing a Cash Cannon at the US Economy—But at What Cost? 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