Monday, 26 October 2009

Fed reverse repo failure?

Rumours are that the Federal Reserve Bank attempted to reverse its quantitative easing programme last week, or rather attempted to test the mechanism, and failed. This only a rumour mind you.

Supposedly they attempted to sell $100bn worth of assets (TARP assets? Presumably not) under a repo agreement, ie agreeing to repurchase them later for more, so no risk to the buyers - the "for more" bit giving the buyers some interest - and the bond buyers sat on their hands and refused to bite.

Had the operation worked it would have withdrawn $100bn of liquidity from the US markets for the period of the repo agreement. (The Fed aren't so bold as to attempt to outright sell the assets; probably wise, that could trigger a price collapse.)

Back to the drawing board, guys!

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