ANALYSIS: FED REPO OPTIONS INTEREST WANING; YEAR-END RISK OK?
economeister.com
By Joseph Plocek
WASHINGTON (MktNews) - Interest in the Federal Reserve's repo options sales is waning, suggesting dealerships may be sated with the year-end protections already in place.
The options to complete repo contracts with the Fed at maximum rates over the prevailing Federal funds target are part of the Federal Reserve System's Standby Financing Facility for Y2K.
The decreased interest in the options sales, which were inaugurated Oct. 20, can be seen in two measures of demand. Options sales amounts were increased through Nov. 10, but more recently were trimmed. Also, the volume of bids submitted to the amounts awarded to dealers, fell back during November from its peak.
Sandra Krieger, senior vice president of the Federal Reserve Bank of New York for open market operations, simply announced the new sales amounts for the Nov. 23 option auctions at $10 billion of the December 23 options strip, $25 billion of the December 30 strip and $20 billion of the January 6 strip.
The comparable amounts were $15, $30 and $20 billion this week; and $30, $50 and $40 billion in the peak sale week of Nov. 10. Moreover, Krieger, who cited good demand at prior sales and added two auctions to the schedule on Nov. 4, had no comment on the recent sales.
At the same time, the volume of bids submitted for the year-end protection has slipped. The peak bid-to-cover ratios for the Dec. 23 was 4.66 at the Oct. 27 sale; for the Dec. 30 package it was 6.63 at the inaugural offering on Oct. 20; and for the Jan. 6 package it was 7.17 on Oct. 27.
The stop-out rates at which the options packages were awarded also have risen from fractions of a basis point to whole basis points recently. This is another indication that it takes higher rates to place the repo options.
Why has interest in the Standby Financing Facility diminished? "It could just be that financial firms are now well prepared for Y2K," said one source.
The total volume of Fed repo options sold or announced so far is almost $99 billion for Dec. 23, $198 billion for Dec. 30, and $129 billion for Jan. 6 -- or $426 billion. That is almost six times the net $70 billion in dealer positions reported for Oct. 20.
>>>Coincidentally, Oct 20 is the first big up day off the
>>>market bottom. |
