Fed's term repo operation receives no bids for first time

NEW YORK: The Federal Reserve’s term repurchase agreement (repo) operation on Friday morning received no bids out of a possible $500 billion for the first time since regular operations began last year.

The lack of bids suggests that liquidity has improved in the market for short-term borrowing of government securities as the Fed has pumped in trillions of dollars to stabilize a market essential to the smooth functioning of the financial system as the coronavirus outbreak ravages the US economy.

For the overnight repo operation, only $6.75 billion out of a possible $500 billion were submitted and accepted.

The New York Fed has been intervening in money markets since mid-September, when a shortage of cash led to a spike in short-term borrowing costs. Policymakers initially planned to scale back those offerings this year, but they pivoted to offering vast amounts of liquidity to keep markets functioning smoothly after investors became more concerned about the coronavirus outbreak.

The Fed now offers up to $1 trillion in overnight repo support daily, along with several longer-term operations, but dealers are taking only a fraction of the available cash. Borrowing costs have also remained low after the central bank slashed interest rates to near zero, suggesting there is not a shortage of liquidity.

However, the low demand could also be due to other drastic measures the Fed has taken to keep credit flowing through markets at a time when spooked investors are fleeing to safety. The Fed ramped up its bond purchases and rolled out several new facilities to backstop different sectors of the bond market.

The Fed’s balance sheet surged to a record $5.3 trillion after growing by more than half a trillion in a week, according to data released Thursday. The Fed committed to open-ended bond purchases to ensure that markets are functioning smoothly, a move that provides more liquidity in the banking system and could lessen the need for support from the repo market.

Over the past several weeks, policymakers also ripped open their crisis era playbook to revive old tools and create new programs to support corporate borrowing, municipal loans and other credit markets. The Fed will soon announce the details for a new Main Street lending facility to support small businesses, a program some entrepreneurs say is needed quickly to avoid a repeat of the last financial crisis.