U.S. dealers not returning Fed's bonds on time
Mon Mar 3, 2008 4:30pm EST
NEW YORK, March 3 (Reuters) - More U.S. Treasury debt issues borrowed by bond dealers have not been returned to the Federal Reserve on time, underscoring the huge recent demand for the securities, according to Fed data released on Monday.
The Fed holds a daily auction of Treasury securities from its portfolio. The winners, primary dealers that are qualified to conduct business directly with the Fed, are then allowed to borrow Treasuries from the central bank for one day.
If a dealer does not return the borrowed security to the Fed on time, the loan is considered a "fail" and will be extended for an additional business day. The dealer will incur a penalty fee and pay the loan re-priced at a rate set by the New York Fed.
Five Treasury issues lent overnight to dealers, worth $3.1 billion, were extended on Friday, compared with only one issue totaling $378 million on Thursday, according to Fed data available on Monday.
This jump in extension happens from time to time when there is a scarcity of Treasuries in the repurchase, or "repo", market, where traders borrow a security from one another and return it at a later date.
"It's an indication of repo tightness. Securities scarcity is an issue," said Louis Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.
The keen demand for Treasuries, amid volatility in the stock market and subprime-related write-downs among financial companies, has been centered among five-year and 10-year issues, analysts said.
"In the current market, this dislocation is a sign of huge demand and volatility in the Treasuries market," said Tom Sapio, a managing director at Cantor Fitzgerald in New York.
Given the heavy demand for Treasuries and other low-risk assets, the Fed could see more fails from its securities loan program, analysts said. |
