When markets are in panic and when they have decoupled from what was expected, governments have the power to intervene to keep the system running. They cannot act as a backstop against any financial losses, but they can keep a sense of normalcy in place. The Federal Reserve Bank of New York has announced $500 billion in short-term bank funding, which is really a $1.5 trillion effort.
It is important to refrain from thinking that $500 billion, or $1.5 trillion, is being used as “helicopter money” in this case. It is a substantial figure, but some clarity may be worthwhile, as this is not money just being thrown at the public or to U.S. companies across the board.
The New York Fed’s Open Market Trading Desk released a new schedule of Treasury securities operations regarding its repurchase agreement operations. This is effectively the “repo” efforts and is intended to thwart some of the temporary disruptions in Treasury financing markets around so much economic panic.
According to the New York Fed, the fresh changes announced on Thursday were to address “highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.”
This includes a change in the “maturity composition” for U.S. Treasury securities but includes other securities as well. On top of recent infusions ($60 billion reserve management purchases starting March 13, 2020, through April 13, 2020), the New York Fed’s trading desk will purchase a range of maturities intended to match the maturity composition of Treasury securities outstanding. In short, it’s buying across the entire yield curve.
As far as the details of what more is coming, the Fed’s trading desk will distribute reserve management purchases across 11 sectors. Those include nominal Treasury coupons and Treasury bills, as well as Treasury Inflation-Protected Securities (TIPS) and floating rate notes.
The New York Fed will start its purchases in a day, on Friday, March 13, 2020. Its announcement further clarified that the distribution of purchases across sectors also will be the same distribution that the New York Fed’s trading desk uses to reinvest principal payments from the Federal Reserve’s vast holdings in agency debt, agency-issued mortgage-backed securities and in its holdings of Treasury securities.
As for the dollar amounts and the $500 billion incremental repo efforts, the statement noted:
Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020. Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule. The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.
For the duration of time ahead, the announcement added:
Reserve management purchases into the second quarter will continue to be conducted with this maturity allocation. The terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation.
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