Borrowing rates skyrocketed on Tuesday, 18th September, 2019 in a seemingly overlooked yet critical part of the global financial system.
A crack just emerged in the financial markets: The NY Fed spends $53 billion to rescue the overnight lending market. The spike in overnight borrowing rates led to the New York Federal Reserve making an unprecedented rescue, the first of its kind in ten years.
“It’s unprecedented, at least in the post-crisis era,” said Mark Cabana, rates strategist at Bank of America Merrill Lynch.
The New York Federal Reserve launched what has been described as an “overnight repo operation,” as the central bank looks to ease pressure in markets by purchasing Treasuries and other securities. The aim is to pump as much money as possible into the system and ultimately keep borrowing costs from creeping above the Fed’s target range.
The first attempt by the NY Fed was canceled due to what was termed as “technical difficulties.” However, it only took a few minutes for the NY Fed to successfully inject $53 billion into the system. The episode further demonstrates evidence of emerging cracks in financial markets, which also raises concern that the Federal Reserve could be losing its grip on short-term rates.
“The funding markets are clearly stressed,” said Guy LeBas, managing director of fixed income strategy at Janney Capital Markets. “It’s going to require Fed action.”
The NY Fed also announced later on Tuesday of a planned repurchase agreement operation on Wednesday that would aim to repurchase up to an additional $75 billion.
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