Fed Starts New, Third Repo Operation, Again Way Oversubscribed

Nov. 25, 2019 (EIRNS)—In addition to $68.5 billion in overnight repo loans given to major bank(s) this morning, the New York Federal Reserve Bank conducted the first operation of its third, longer-term repo loans. This one was for 42 days (i.e., going beyond year-end). Some $25 billion was loaned, as planned, but double that, $49 billion, was demanded by the bank(s). The yields for these 42-day loans were noticeably up, close to the 1.75% upper bound of the Fed’s new range, though still within it.

The rise in the Fed’s asset book since Sept. 17 has now reached $315 billion—liquidity repo loans that have gone out and not come back, combined with a $60-plus billion injection so far from “not-QE.” Aside from the attempt to forestall the collapse of Deutsche Bank, which experts assume is a significant part of this operation, just imagine all the new speculative risks the other Wall Street and City of London banks are taking with all this liquidity, now that they have the Fed providing it indefinitely, and they don’t have to maintain the interbank lending market themselves. In addition, they know it’s being kept secret and both media and Congress are ignoring it.

Back on Nov. 19, a column in “Wall Street on Parade” by Pam and Russ Martens observed that the interest rate on 90-day loans against AAA-rated commercial paper has been going up in the past year (from 2.18% to 2.27%) while those on 90-day Treasury securities were going down by one-third, an unusual situation. And the total size of the commercial paper market—where indebted corporations borrow slightly longer-term than in the repo market—has been shrinking in 2019. This may indicate the same kind of unwillingness to loan to corporate counterparties, as in the repo market.

The Financial Times reported today a Bank of America-Merrill Lynch count that there are now 548 “large or mid-range zombie companies” in OECD countries. During the 2008 crash, this count reached a peak of 626, not much higher. Zombie companies are those whose annual earnings don’t even cover the interest on their debt—which they must borrow.

If the Federal Reserve’s next step is to inject liquidity to the corporate commercial paper market, it will be retracing its actions in the middle of the 2008 crisis, that led to $950 billion being printed and injected by the Fed, most of it outright purchases of commercial paper from banks or money-market funds. And that was not enough.