Fed Adds $24 Bln in Temporary Funds, Most Since June (Update2)
By Ye Xie
Aug. 9 (Bloomberg) -- The Federal Reserve added $24 billion in temporary reserves to the banking system, the most since June, amid a surge in demand for cash from banks roiled by U.S. subprime loan losses.
Federal funds, the U.S. overnight interbank lending rate, traded at 5 1/2 percent, above the Fed's target rate of 5 1/4 percent, according to ICAP Plc, the world's largest interdealer broker. The benchmark London interbank offered rate in dollars rose to a six-year high of 5.86 percent today. BNP Paribas SA halted withdrawals from three investment funds today and Dutch investment bank NIBC Holding NV said it had lost at least 137 million euros on subprime investments.
``Demand from European banks is driving Fed funds higher,'' said John Murphy, senior vice-president at Tullett Prebon Plc, the world's second-largest inter-dealer broker, in Jersey City, New Jersey. ``European banks have lack of liquidity in the euro- dollar market which spilled over to the Fed fund market.''
The European Central Bank today loaned 94.8 billion euros ($130.2 billion) to meet banks' cash needs. The ECB said it will provide unlimited funds today at 4 percent, its current benchmark rate, after demand for cash in the European money markets drove interest rates higher. The Bank of Canada today said it will provide liquidity to ``support stability.''
`Tremendous Anxiety'
``The Treasury Department continues to monitor markets and remains vigilant,'' Jennifer Zuccarelli, a spokeswoman in Washington, said in an interview.
The Fed split the additions into $12 billion in 14-day repurchase agreements and the same amount in overnight repos. The total is the most since $27.95 billion on June 4.
Wrightson, an ICAP research unit specializing in U.S. government finance, had expected the Fed to add a total of $15 billion today. The Fed usually arranges 14-day repos every Thursday in addition to its daily operation.
``We are seeing to a less significant degree something similar to what we saw in Europe,'' said Ward McCarthy, principal at Stone & McCarthy Research in Skillman, New Jersey. ``There is tremendous anxiety over what happens in the markets, especially the money market.''
Fed funds' weighted average was 5.27 percent yesterday, after trading between 5 3/16 percent and 5 3/8 percent, according to the central bank.
Repos
The Fed funds rate will probably drop to trade at the target this afternoon, said William Carey, president at Tullett Prebon in Jersey City.
The Fed added more than they needed ``to calm the market down,'' Carey said. ``They put liquidity in more than needed because they want the rate back to 5 1/4 percent.''
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.
Repos help maintain enough money in the system to keep overnight interest rates close to the central bank's target. They don't signal a policy change.
For Overnight Repos:
Type of Collateral Submitted Accepted Stop Rate
U.S. Treasuries $23.45 billion $4.1 billion 5.15 percent
Agency $15.6 billion $2.9 billion 5.25 percent
Mortgage-backed $18.5 billion $5 billion 5.28 percent
TOTAL $57.55 billion $12 billion
For 14-Day Repos:
Type of Collateral Submitted Accepted Stop Rate
U.S. Treasuries $34.7 billion $3.999 billion 5.15 percent
Agency $39.95 billion $2.071 billion 5.28 percent
Mortgage-backed $36.5 billion $5.93 billion 5.31 percent
TOTAL $111.15 billion $12 billion |
