Federal Reserve Cuts, But Rate Corridor Remains Elevated

Following the Federal Reserve’s decision to cut rates yesterday, Nelson Thomson, Government Analyst, Refinitiv provides his insights on the rate corridor below.

ESZs and stocks Rate corridor

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“Today third NY Federal Reserve repurchase operation saw $83.875 bn in bids vs. the total of $75.0 bn accepted. Treasuries dominated the operation with $55.235 bn taken at an average rate of 1.845%. Mortgages had $19.157 bn taken at an average rate of 1.885%.

Rate corridor and Repo markets in focus

Today’s operation saw $3 bn more in submissions than yesterday. Now, the concern for the Repurchase market is simple. The GC market opened at 2.20 % bid and declined to levels 1.95% before the operation.  How much of the early move to lower rates was new longs (in collateral) playing the buy early and sell to the Fed game. If heavy amounts of collateral were purchased with the anticipation of lower rates later in the day, then it is possible that GC may spike to higher rates will ensue as players are very nervous. Thus, the Fed could be forced to do another repurchase operation.

Further adding to today’s repo mania is the adjustment to a new rate structure. The IOER level and RRP level have been set at 1.80% and 1.70% (30 bps cut in each). However, Fed funds are well above the 1.75% to 2.00% rate corridor target set by the FOMC at yesterday’s meeting. Fed funds currently trade 2.15% bid at 2.25% offer.  In the previous rate corridor of 2.00% to 2.25%, Fed funds traded at 2.10% to 2.13% so one can see that Fed funds, due to the recent upheaval that started on Monday, have not adjusted. Hence, the Federal Reserve could be in the markets until the Fed funds levels move inside the 1.75% to 2.00% rate corridor.”

 

What do you think about the Fed decision to cut rates? Should we worry about the repo markets or is it all a non issue? Tell us by sounding off in the comments section below!




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Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver