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Federal Reserve Fires $ 3 Trillion Worth Ammo


Federal Reserve Full Statement :

The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released a new monthly schedule of Treasury securities operations and has updated the current monthly schedule of repurchase agreement (repo) operations. Pursuant to instruction from the Chair in consultation with the FOMC, adjustments have been made to these schedules to address temporary disruptions in Treasury financing markets. The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities. Term repo operations in large size have been added to enhance functioning of secured U.S. dollar funding markets.

  • As a part of its $60 billion reserve management purchases for the monthly period beginning March 13, 2020 and continuing through April 13, 2020, the Desk will conduct purchases across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. Specifically, the Desk plans to distribute reserve management purchases across eleven sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes. The distribution of purchases across sectors will be the same distribution as the Desk uses to reinvest principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in Treasury securities. The first such purchases will begin tomorrow, March 13, 2020.

  • Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020.

  • Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement.

  • Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule.

  • The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.

These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak. Reserve management purchases into the second quarter will continue to be conducted with this maturity allocation. The terms of operations will be adjusted as needed to foster smooth Treasury market functioning and efficient and effective policy implementation.

What it means & impacts on Bonds & Stocks ?

Federal Reserve since February end has been revising the repo operation limit from $25Bn to $150Bn per within a span of three weeks along introduction of new one-month term repo facility. But yesterday it stunned the market with biggest operation since Lehman by announcing $1 Trillion in three month repos over two days ( $500 Bn yesterday and $500Bn today ) along with $500 Bn one month repo offered weekly till this month end. That is total of $3Trillion if fully allotted by month end.

It also made QE official as it announced that it would start purchasing coupon treasuries as part of POMO ( Permanent Open Market Operations) that was last done in 2008 crisis when it officially announced QE.

Below is the coupon schedule :

Federal Reserve since September 2019 restarted asset purchase that resulted in market rally globally till January end when it slowed down the purchase. But as it has restarted in Feb end and enhanced it to a major QE operation this will lead to global markets forming bottom that would be incidentally at the same time when CTA funds finish the stock liquidation not below S&P500 level of 2450 in spot and futures. Today evening the Congress is expected announce measures in the coronavirus bill that will provide relief to many SMEs and tax payers .

Equity Markets and Bond Markets have reacted positively and this will further enhance by the Congress brief on coronavirus bill to assist the sectors hit.

OUR VIEW :

All comes inline to form a bottom for equity markets globally.

The accelerated selling was done by CTA funds that were 100% long on global equity till Feb mid and as the levels were triggered by S&P 500 along with gamma changes the liquidation accelerated. As S&P500 breached 2915 there were two more levels around where selling would accelerate and would finish at 2450 levels as the stocks weight was at 23%.

Thursday evening will be marked as very critical point for Equity and Bond markets as Fed announced a massive repo liquidity till month end , S&P 500 reached Goldman Sachs June 2020 bottom target and CTA funds finished the selling. This would turn the flows and levels very quickly.