Federal Reserve to Arrange $8 Billion of Term Repos

Federal Reserve to Arrange $8 Billion of Term Repos (Update2)

By Ye Xie

Nov. 26 (Bloomberg) -- The New York Federal Reserve will arrange $8 billion of long-term repurchase agreements, or repos, in a bid to hold down banks' borrowing costs through year-end.

The Fed's move, the first such operation since 2005, follows the European Central Bank's announcement last week that it will make extra cash available to banks to ``counter the re-emerging risk of volatility'' in money markets. The average U.S. overnight rate has been above the Fed's 4.5 percent target almost every day since Nov. 9, suggesting banks are reluctant to lend to each other amid mounting subprime market losses.

``The Fed is pulling out all stops to try to alleviate funding pressures in the money and financing markets as the markets lurch into year-end,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``Given the heightened state of credit aversion going on it looks like the only magic bullet that they have to help the markets is a rate cut.''

Central bankers next meet to set the overnight target rate on Dec. 11. They have cut the rate twice since September, bringing it down from 5.25 percent, in a bid to buoy bank lending and keep the U.S. economy out of recession.

The New York Fed said in a statement that it will arrange the first of the long-term repo operations on Nov. 28 ``in response to heightened pressures in money markets for funding through the year-end.'' The repos will mature on Jan. 10. The Fed also said that it plans to ``provide sufficient reserves to resist upward pressures'' on the overnight rate in coming weeks.

`Particular Concern'

``What the Fed's trying to do here is let the market know that they will provide liquidity around year-end, which is of particular concern in financial markets right now,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc. ``So anything they can do around that should help alleviate concerns as we head to year-end.''

In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers and the cash to the Fed.

In a separate statement, the Fed said it will raise the limits on the amount of Treasury securities dealers can borrow from its System Open Market Account. Through the account, dealers can borrow Treasury notes and bills that are scarce in the repo market.

Borrowing Limits

Primary dealers will be able to borrow 25 percent of the amount available, with a maximum of $750 million per Treasury security, up from the previous limit of 20 percent with a maximum of $500 million per issue, according to the Fed's statement.

The Fed said it has also increased the amount available for borrowing each day to 90 percent of an issue from 65 percent. Dealers can also borrow securities maturing in six days or longer. The Fed had previously limited the borrowing only to issues maturing in at least 13 days.

In the daily so-called open market operation, the Fed added $10.25 billion through overnight repos today. There's $6.3 billion in repos maturing today. Wrightson, an ICAP research unit specializing in U.S. government finance, had expected the Fed to add as much as $15 billion.

Repos help maintain enough money in the system to keep overnight interest rates close to the central bank's target.

The overnight rate traded at 4 11/16 percent today, above the Fed's 4.5 percent target rate.