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Federal Reserve's bond purchase tool proves effective: Year-end repo rate expectations decline
Odaily Planet Daily reports that institutional analysis indicates that anxiety in the US bond market has eased by the end of the year, with market expectations that the Federal Reserve's new financing plan will alleviate seasonal liquidity pressures. Banks typically reduce lending and hoard cash at the end of the quarter and year to adjust their balance sheets, which can lead to higher short-term money market rates at cross-period points. For example, in September 2019, a sharp decline in bank reserves due to concentrated tax payments and debt repayments caused repo rates to spike significantly. However, after the Federal Reserve announced last week that it would purchase short-term Treasury bills to manage cash levels and ensure control over the interest rate target range, repo market pricing during the year-end period (December 31 to January 2) dropped sharply. Bob Savidge, Head of Macro Market Strategy at BNY Mellon, stated, “The Federal Reserve aims to avoid sharp interest rate fluctuations on tax days or at year-end. Now that it has appropriate tools, it is expected that the market will not experience the severe volatility seen in 2019.”
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