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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Lucretius who wrote (35649)	12/21/1999 6:41:00 PM
From: Les H	Respond to of 99985

US REPOS: NO REPO OPTIONS SEEN TAKEN THURS; LOW Y2K RATES By Ellen Taylor NEW YORK (MktNews) - No dealers are expected to exercise options Thursday on overnight repos purchased since October under the Fed's $481 billion first ever repo-options program, traders said. That's because federal funds are trading around their current 5 1/2% target this week, far below the 7% strike price dealers must pay if they opt to borrow money from the Fed through the standby options financing facility. The amount of repo options sold for the Dec. 23 to Dec. 30 period totals $113.85 billion. Dealers must pay the Fed 150 basis points above the funds target in place that day, plus any premium they paid to get access to the options on auctions held between Oct. 20 and Dec. 1. So unless funds trade at 7% or higher this week, there will be no demand by dealers to make use of the backup financing, traders said. The first exercise date for the options is Dec. 23, and they can be renewed every day until Dec. 30, when the second financing package will begin. Repo traders said they expect greater financing pressures for the Dec. 30 strip because it's the only one of the three options packages that covers the actual Y2K turn in the calendar when most of the financing pressures are likely to surface. That is, if any year-end pressures emerge at all, traders said. Such an absence would make the Federal Reserve very happy, they said. Peter Fisher, executive vice president at the New York Fed who is entrusted with greasing the liquidity wheels in the banking system over Y2K has said the Fed hopes none of the options are ever exercised, that they remain "out of the money" and interest rates low over the turn. "Fisher will get more credit if interest rates go to zero than if they go to 50%" on Dec. 31, said one trader. Towards that goal, the Fed has added a huge amount of temporary reserves in longer-term repos that mature between Jan. 3 and Feb. 2. The Fed's outstanding repos that span the Y2K turn total about $60.38 billion to date, including $6 billion in 5- and 3-day forward repos that take effect on Dec. 30 and 31. Dec. 31 is notoriously the most difficult day in the year for dealers and investors to get financing funds because of the high demand for excess liquidity for window dressing of balance sheets that surfaces that day. That problem is expected to be even harder to satisfy this year because of the added historical quirk of the threat of potential computer glitches related to the change in the calendar from 1999 to 2000. Still, never before has the Fed added so much money for such a long period of time, merely to smooth trading and add confidence to the money markets over the year-end date, analysts said. It only got approval to enact repos longer than 60 days at the late August FOMC meeting, Fed officials said. The Fed has also bought about $9.8 billion in Treasury coupons outright in the fourth quarter, adding permanent reserves, said Dana Saporta, an analyst at Stone & McCarthy Research Associates in Princeton, N.J. As a result, borrowing rates stand at wide spreads currently over the New Year's weekend. Federal funds are trading between 7% and 8% for domestic banks, down from 11% in September, while European banks are paying between 8% and 11%, a broker at Prebon Yamane (USA) said. But Treasury repo rates are trading at about 5.85% over the turn, compared with 6.50% on agency repos and 6.60% on mortgage-backed repos, said a repo trader. Dwindling Treasury issuance in general, the rising demand for Treasuries on Y2K credit preferences and the large amount of outstanding over-Y2K Fed repos have all caused financing rates to drop sharply on repos backed by Treasury collateral, trader said. But history has often shown that fears of skyrocketing funds rates on Dec. 31 have been overblown, traders said. "In the last four or five years, the effective funds rate has averaged below the target on Dec. 31," said one trader. "And we started seeing a compression of year-end spreads after the Fed sold the repo options." He said that the effective funds rate on Dec. 31, as implied by the December fed funds futures contract, suggested funds are now expected to trade under 4.50% over the New Year's weekend, a full 100 bps below the current funds target. >>>Looks like the Fed can just collect the options premiums.

To: Lucretius who wrote (35649)	12/21/1999 6:45:00 PM
From: pater tenebrarum	Read Replies (1) \| Respond to of 99985

did you check the soaring t-bill yield? anyway, as long as the t-bond stays within the rising wedge pattern from last years lows it could still reverse. note that Rydex ratios on bonds are creeping up. otoh, if we break that pattern to the upside, we could be in for an acceleration in the bond selling. gold is moving up smartly...staying strong in Asian trade. there is some time-segment/cycle analysis that suggests the big upward break in gold prices could happen in January.

To: Lucretius who wrote (35649)	12/21/1999 6:56:00 PM
From: Cathedra	Respond to of 99985

I have no customized charting tool at my disposal, but my quick and dirty read of charts available online is that TYX has penetrated the middle tine of the fork (extrapolating from September). But even if I am right, I doubt that bonds will slow down the NASDAQ; the Dow, maybe.