Liquidity Shortage Getting Worse: Fed’s Repo Oversubscribed As Funding Demand Soars 50% Overnight

20 minutes after today's repo operation began, it concluded and there was some bad news in it: as we feared, yesterday's take up of the Fed's repo operation which peaked at $53.2 billion has expanded substantially, and according to the Fed, today there was a whopping $80.05BN in bids submitted, an increase of $27 billion, or 50% more than yesterday.

It also meant that since the operation - which is capped at $75BN - was oversubscribed by over $5BN,that there were participants who did not get the last-minute liquidity they needed, and that the Fed will see demands to either expand the size of its operations, or implement a fixed operation and/or transition to permanent open market operations, i.e. QE

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By comparison this is what yesterday's repo operation looked like:

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What is immediately notable is that except for agency paper, there was a greater use of both Treasury ($40.9BN to $51.6BN) and Mortgage-backed ($11.7BN to $27.8BN) collateral. The only silver lining: the step out rate on agency paper dropped from 3.00% to 2.1% however with virtually nobody using that, it is a largely meaningless easing in terms.

Finally, the worst news is that immediately after the operation, overnight repo remained elevated, with Reuters reporting the rate was 2.25%-2.60% after the latest repo operation, confirming that the liquidity shortage continues with the high end of repo still far above fed funds.

By: Tyler Durden of ZeroHedge; repost by Todd M Schoenberger of Wellington Insights

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