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A Tough Couple of Days Ahead for the Fed (and Markets)

There was a noticeable sigh of relief in the markets yesterday as Tuesday’s freefall didn’t repeat itself. The one item helping out the markets that didn’t make it into the mainstream media was the fact that the Fed stepped up to the plate with an extra $9.25 billion in instant cash via overnight and two day repos. That action places yesterday in the top 20 add days in the last 500 trading days (top 4%). Most other times we have seen such huge adds were on days with little or no repo expirations.

Today and tomorrow the Fed faces a very daunting task. $28.25 billion in repos are expiring, AND the  Treasury is in the midst of settling a total of $44 billion in net new borrowing ($21 billion today, and $23 billion tomorrow). Those are the 7th and 11th highest Treasury net borrowing amounts in the last 500 trading days.

Combined Fed expirations and Treasury net borrowing puts today and tomorrow at the 2nd and 20th highest combined number over those same 500 days. To put things into perspective, the largest Fed repo issue day (total, not net) in the last two years was $25.5 billion on December 21, 2006. Even if they matched that number both today AND AGAIN tomorrow, there would still be a huge liquidity shortfall in the system.

Liquidity pressures indeed, ya think?

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