Wednesday, August 4, 2010

Fed action?

Over at briefing...a multiple-time-per-day read for me...cuz the guy who writes it is just too funny. The bond market got this:

10:52 ET 10-Yr: -09/32..2.941%.. USD/JPY: 86.35.. EUR/USD: 1.3139
Fed Up: The Fed purchased $0.180 bln in tri-party reverse repo as part of the operational readiness program announced on Tues in the small scale tests. They will continue to conduct "similar series of small-scale, real-value reverse repurchase transactions with primary dealers using all eligible collateral types, including, for the first time, agency mortgage-backed securities (MBS) from the SOMA portfolio"...BUT "Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future." Got that?
I have no idea what reverse repo's do or are...I just know this seems to be written with a bit of snark and stuff...hopefully someone like Boockvar will take notice and explain it to us stock idiots.

From Wikipedia:
A Repurchase agreement (also known as a repo or Sale and Repurchase Agreement) allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to sell immediately a security to a lender and also agrees to buy the same security from the lender at a fixed price at some later date. A repo is equivalent to a cash transaction combined with a forward contract. The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is the interest on the loan while the settlement date of the forward contract is the maturity date of the loan.

I don't know if this clears it up for any of you...but since they are using MBS as collateral, this is an exit strategy....I confirmed it with my buddy's his take:
"...It sounds like they are taking money out of the system by selling securities from their SOMA holdings (system open market account) with the agreement to buy them back at a predetermined date (maybe as short as overnight) at a pre-determined rate.
So, as a bank, if i want a place to park some cash i can do so by lending money to the fed in the form of a repurchase aggreement (i sell and agree to rebuy). it would be a good alternative to leaving my cash in Fed Funds, assuming that the rate is higher.
It's interesting to hear about them draining liquidity at a time when pundits want more quantitative easing....probably the reason for the long explanation, second half... "this does not change our stance on monetary policy"
makes sense (i buy it) with such a tiny amount.

I sware I can't figure some of this crazy banking juditsu out...I thought this would be welcomed with a big badonkadonk over in bond-land but I guess since it's such a small amount...nobody cares....kind of like when that test of the emergency broadcast system happens to your TV...

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