AT A GLANCE: Fed, 4 Ctrl Bks Unveil Moves To Boost Liquidity
Last update: 12/12/2007 9:28:11 AM
THE NEWS:
The Federal Reserve on Wednesday announced joint actions with central banks around the world aimed at easing tight credit conditions in financial markets.
THE DETAILS:
The Fed said it would hold a series of auctions that would provide term funds to banks against a wide variety of collateral to secure loans at the discount window. The Fed plans to sell $40 billion in December and hold other auctions in January. "By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress," the Fed said in a statement.
TEXT OF FED STATEMENT:
Today, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing measures designed to address elevated pressures in short-term funding markets. Federal Reserve Actions Actions taken by the Federal Reserve include the establishment of a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee). Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress. Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). The first TAF auction of $20 billion is scheduled for Monday, December 17, with settlement on Thursday, December 20; this auction will provide 28-day term funds, maturing Thursday, January 17, 2008. The second auction of up to $20 billion is scheduled for Thursday, December 20, with settlement on Thursday, December 27; this auction will provide 35-day funds, maturing Thursday, January 31, 2008. The third and fourth auctions will be held on January 14 and 28, with settlement on the following Thursdays. The amounts of those auctions will be determined in January. The Federal Reserve may conduct additional auctions in subsequent months, depending in part on evolving market conditions. Depositories will submit bids through their local Reserve Banks. The minimum bid rate for the auctions will be established at the overnight indexed swap (OIS) rate corresponding to the maturity of the credit being auctioned. The OIS rate is a measure of market participants' expected average federal funds rate over the relevant term. The minimum rate for the December 17 auction along with other auction details will be announced on Friday, December 14. Noncompetitive tenders may be accepted beginning with the third auction. The results of the first auction will be announced at 10 a.m. Eastern Time on December 19. The schedule for releasing the results of later auctions will be determined subsequently. Detailed terms of the auction and summary auction results will be available at http://www.federalreserve.gov/. Experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve's current monetary policy tools--open market operations and the primary credit facility--with a permanent facility for auctioning term discount window credit. The Board anticipates that it would seek public comment on any proposal for a permanent term auction facility. The Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will provide dollars in amounts of up to $20 billion and $4 billion to the ECB and the SNB, respectively, for use in their jurisdictions. The FOMC approved these swap lines for a period of up to six months.
MARKETS' REACTION:
Fed action to boost liquidity knocks Tsy market sharply lower - 10-year down 1 1/32 to yield 4.12%, 2-yr down 14/32 to yield 3.20%, up 22 bps. Curve flattens markedly, now at 92 bps from Tue's 105 bps. Bunds and gilts futures extend early losses after confirmation from the Fed it will boost liquidity in money markets to ease tight credit conditions through term auctions. Analysts say the Fed's action reduces the safe-haven appeal of government debt. March bunds are currently down 0.69 at 113.05, with March gilts down 1.00 at 108.10. Treasury futures extended their losses following the Fed's announced liquidity boost. Mar 10-yr note recently off 1 4+/32 at 112-15, while Mar 30-yr bond contract down 1 10/32 at 115-05. Stock futures jumped Wednesday after the Federal Reserve announced further steps to ease the credit crunch, a day after a rate cut that disappointed the market. Dow Jones Industrial Average futures recently rose 230, to 13680. The S&P 500 futures gained 31, to 1508, and Nasdaq 100 futures added 34, to 2123. Changes in futures do not always accurately predict early market moves after the opening bell.
WHAT THEY'RE SAYING:
The Fed's new auctions to pump liquidity in sticky credit markets should hammer the Treasury curve flatter, notes Andrew Brenner of MF Global. The 2/10s curve is at 95BP now versus 105BP Tuesday. "It's clearly an effort to alleviate the concerns banks have in respect to their balance sheets," said Kevin Murphy at Putnam Investment Management, about the Fed liquidity moves. The benchmark high-grade credit derivatives index, the CDX IG 9, tightened considerably on the news, to midpoint 72 bps from a close Tuesday at 79 bps.
(END) Dow Jones Newswires December 12, 2007 09:28 ET (14:28 GMT)
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