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Reuters
3 days ago
- Business
- Reuters
NY Fed flags $1.06 trillion unrealized loss on bond holdings in 2024
NEW YORK, June 3 - The Federal Reserve saw $1 trillion in unrealized losses on its holdings last year, according to a report released Tuesday by the Federal Reserve Bank of New York. The bank said in its annual report, opens new tab for the System Open Market Account, the Fed's massive holdings of cash and securities, that the $1.06 trillion unrealized loss in 2024 was 'modestly higher' than the $948.4 billion paper loss seen in 2023. The state of unrealized losses last year was due to 'higher market interest rates across the yield curve' while partially offset by reduced Fed holdings of bonds. The Fed noted unrealized losses capture the difference between the book value of securities it owns versus the current market price. These paper losses do not affect monetary policy operations and are not an issue of note given that the Fed holds its bonds to maturity. The report added the unrealized loss on Fed holdings will likely prevail for years to come. The Fed's balance sheet in recent years has undergone massive expansion, more than doubling to a peak of $9 trillion by 2022 as the Fed bought Treasury and mortgage bonds to stabilize markets and add stimulus during the pandemic. It has been shrinking its holdings for some time, with the overall size of its balance sheet now at $6.7 trillion. The Fed's large holdings are expected to stabilize in January 2026 at $6.2 trillion, the Fed report noted, based on the current view of market participants.
Yahoo
3 days ago
- Business
- Yahoo
NY Fed flags $1.06 trillion unrealized loss on bond holdings in 2024
By Michael S. Derby NEW YORK -The Federal Reserve saw $1 trillion in unrealized losses on its holdings last year, according to a report released Tuesday by the Federal Reserve Bank of New York. The bank said in its annual report for the System Open Market Account, the Fed's massive holdings of cash and securities, that the $1.06 trillion unrealized loss in 2024 was 'modestly higher' than the $948.4 billion paper loss seen in 2023. The state of unrealized losses last year was due to 'higher market interest rates across the yield curve' while partially offset by reduced Fed holdings of bonds. The Fed noted unrealized losses capture the difference between the book value of securities it owns versus the current market price. These paper losses do not affect monetary policy operations and are not an issue of note given that the Fed holds its bonds to maturity. The report added the unrealized loss on Fed holdings will likely prevail for years to come. The Fed's balance sheet in recent years has undergone massive expansion, more than doubling to a peak of $9 trillion by 2022 as the Fed bought Treasury and mortgage bonds to stabilize markets and add stimulus during the pandemic. It has been shrinking its holdings for some time, with the overall size of its balance sheet now at $6.7 trillion. The Fed's large holdings are expected to stabilize in January 2026 at $6.2 trillion, the Fed report noted, based on the current view of market participants. 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
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
Bloomberg
22-05-2025
- Business
- Bloomberg
NY Fed's Perli Sees Early Signs of Pressure in Money Markets
The manager of the Federal Reserve's massive portfolio of securities said the central bank's effort to reduce the size of its balance sheet is beginning to place pressure on the market for repurchase agreements. That pressure likely means the Fed's tools for controlling short-term interest rates will become increasingly important, Roberto Perli, manager of System Open Market Account at the New York Fed, said in prepared remarks Thursday.
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)
