The Federal Reserve Bank of New York has stepped in to provide liquidity in the Treasury bill market, citing “highly unusual disruptions” due to the coronavirus crisis.
The central bank began Thursday to increase its repurchase operations, offering $500 billion in three-month repos to be followed by another $1 trillion on Friday. It will also start purchasing Treasuries “across a range of maturities,” rather than just short-term bills, as part of a previously announced $60 billion debt purchase program.
“This is a full-blown crisis response operation, intended to make it abundantly clear that the Fed will not allow liquidity to dry up,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients.
The NY Fed said it was acting to “address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.”
Following the Fed’s announcement, the outstanding amount of money lent to major banks and financial firms surged to its highest level since the Fed resumed repo operations in September to help maintain the federal funds rate within the target range amid concerns it was losing control of the key lending rate.
As CNN reports, the Fed has accelerated its weeklong efforts “aimed at easing fears that companies will lose access to capital or that markets will become unhinged.”
“The Fed is all in. They’ve fired their nuclear weapon. and they did it because financial markets are seizing up,” said James Bianco, president of Bianco Research. “There is no liquidity in the markets. They are trying to unstick them.”
On Thursday, not only did U.S. stocks plunge again but there were reports from trading desks that many assets that are normally liquid, including Treasuries, were freezing up, with securities not trading widely.
“The market in a sense broke today. The Fed came out and fixed it,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.