Banks lapped up the $60bn of two-week loans on offer from the Federal Reserve Bank of New York on Thursday, as appetite to secure funding ahead of a potentially volatile end to the third quarter remained unsated.
The New York Fed increased the size of Thursday’s cash injection, after Tuesday’s $30bn operation saw more than $60bn of demand, while an overnight loan offering on Wednesday drew almost $90bn of bids for the $75bn on offer.
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Banks submitted requests for $72.75bn of two-week loans on Thursday. While that was again more than the Fed was offering, borrowers paid an average interest rate of just below 1.9 per cent for the cash, a drop from the 1.96 per cent paid on Tuesday. That suggests a less dire need for cash over the end of the quarter, a time when short-term lending markets can dry up as banks focus on the snapshot of their finances that will be shown in quarterly earnings reports.
“There is obviously still a lot of demand for term funding but we are getting to a point where repo markets are quite calm,” said Jon Hill, an interest rate strategist at BMO Capital Markets.
The New York Fed, which functions as the markets arm of the US central bank, stepped in to ease funding pressures in short-term lending markets after a spike in the cost of borrowing cash in the overnight repo market last week. The repo market is where banks and investors borrow cash in exchange for treasuries and other high-quality collateral.
Some market participants had criticised the New York Fed for being flat-footed in its response last week. It conducted its first overnight repo operation on Tuesday September 17, following a sharp rise in repo rates the day before.
