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Fed Adds $88.1 Billion to Financial System in Latest Repo Transaction

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10/10/2019 | 09:32am EDT

By Micah Maidenberg

The Federal Reserve Bank of New York added $88.1 billion to the financial system Thursday, using the market for repurchase agreements, or repo, to relieve funding pressure in money markets.

Banks asked for $45.5 billion in overnight reserves, all of which the Fed accepted, offering collateral in the form of Treasury and mortgage securities.

In a separate operation, banks asked for $42.6 billion in 14-day loans, all of which was accepted by the Fed, offering collateral in the form of Treasury and mortgage securities.

In the repo market, borrowers seeking cash offer lenders collateral in the form of safe securities -- frequently Treasury bonds -- in exchange for a short-term loan. The term of these loans can be as short as overnight.

When the Fed adds money to the financial system through the repo market, it is acting as a lender. In typical repo-market transactions, lenders can include money-market mutual funds, banks or hedge funds that are seeking to earn a slightly higher rate of interest than what is available from holding very short-term government securities. The borrowers are often banks, securities firms or hedge funds that use the cash to finance positions in the market.

Banks and hedge funds borrow or lend depending on their needs and investment goals.

The Fed began offering repo loans last month after a shortage of available cash in the financial system led repo rates to climb as financial companies scrambled for overnight funding. The actions marked the first time since the financial crisis that the Fed had taken such actions.

Last week, the Fed said it would extend its scheduled repo lending through Nov. 4. It said it would continue to offer overnight repos, which are meant to relieve funding pressure in money markets, for an aggregate amount of at least $75 billion each night through Nov. 4.

The Fed said it would extend its two-week repo loans as well. It plans to offer at least $45 billion between Oct. 8 and Oct. 11. After that, the amount available will drop to $35 billion through Oct. 29.

Write to Micah Maidenberg at micah.maidenberg@wsj.com

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