[movermike] movermike: Talking With Rob Kirby About Central Bank Operations

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Posted by movermike:
Talking With Rob Kirby About Central Bank Operations
http://www.movermike.com/posts/1186862779.shtml


   We've read and heard that Central Banks (CBs) in the world injected
   liquidity into the banking system on Thursday and Friday of upwards of
   $300-400 Billion. I asked Rob Kirby, financial columnist on
   [1]Financial Sense Online and [2]Le Metropole Cafe and owner of
   [3]Kirby Analytics to answer some questions about the CBs efforts.

   Mover Mike: I have a question about the "temporary" injection of
   liquidity by the central banks over the last two days. The central
   banks inject cash by buying bonds, repos, how does that money come
   back out? What happens to a three day repo at the end of the three
   days? So far it looks like all the CBs have injected about $300
   Billion. Is it in the system permanently? If not aren't we back to the
   same circumstances as before the injections?

   Rob Kirby: When the Fed conducts [4]Open Market Operations they are
   classified under 2 broad headings:

     TOMO â Temporary Open Market Operations
     These purchase and resale agreements [hence the name Repo]
     typically range in duration from 1 â 14 days. A One day Repo would
     have the Fed purchase collateral [Treasury Bond, Agency Bond or
     Mortgaged Backed Sec.] from the dealerâs inventories TODAY [at an
     implied yield] and have them sell it back to them tomorrow. This
     provides the dealer with temporary [overnight â 14 days] cash to
     fund their businesses.

     POMO â Permanent Open Market Operations
     These are outright purchases of bills, bonds and/or notes from the
     dealerâs inventories and constitute permanent additions to money
     supply.

   Lately, the Fed has been adding via TOMO â a combination of 1 day or
   over-the-weekend Repos in conjunction with multi-day Repos. What was
   interesting in yesterdayâs three rounds of over-the-weekend Repos
   [apart from the fact that a virtually unprecedented 3 open market
   operations were conducted in the same day] was the stop-out / average
   rate at which the third round [3 billion worth] of Repos were
   conducted. In this action, the Fed was providing overnight funding to
   the dealers at an average rate/cost of 5.127 %. THEIR TARGET FOR FED
   FUNDS IS 5.25 %.

   Mover Mike: What would indicate the FED is flooding the system,
   besides POMO, of permanent injections that are hard to get back out?

   Rob Kirby: Actually, when you look at âliquidity addâ by the Fed â it
   is useful to view the Repo add pool in aggregate. For instance, the
   Fed conducted 12 billion in 14 day Repos on Thursday and followed that
   up with 38 billion of over-the-weekend Repos on Friday. So â net in
   aggregate â there is 50 billion worth of âcashâ in the banking system
   that did not exist on Wednesday. Now, of course, the 38 billion added
   on Friday âruns offâ on Monday. But then the question of how much the
   Fed will add on Monday and for how long? This also begs the question,
   if the outstanding âtemporaryâ Repo pool never really diminishes â is
   it really temporary?

   You are correct though â POMO or permanent adds to the system are very
   difficult to reverse with creating much market turmoil [like raising
   reserve requirements]. Permanent adds tend to be much much smaller in
   size [there is an assumed multiplier effect of something in the
   neighborhood of 10x to any POMO add. That is to say 2 billion in POMO
   would be akin to 20 billion worth of overnight or temporary add.

   Mover Mike: One more question, [5]Jesse has a chart of Treasury Repos,
   are these also TOMOs and I see the total outstanding is near $40
   Billion Any thoughts on Treasury Repos?

   Rob Kirby: No particular comment other than to say there was 38
   billion in Mortgaged Backed Securities done Friday, Thursdayâs 12
   billion worth of 14 day Repos had an Agency component plus a Mortgaged
   Backed component of perhaps another 5 billion or so.

   So the CURRENT total aggregate Repo pool I estimate is more like

   40 billion Treasury (estimate)
   50 billion MBS (estimate)
   just a guess 20 or so billion Agency
   =============
   110 Grand Total (estimate)

   Thatâs a lot of money.

   If I was a betting man â the financial markets are being groomed for
   an imminent [emergency] rate cut by the Fed.

   Nothing could be more gold bullish and Dollar negative.

   [6]Rob Kirby [7]Kirby Analytics [8]Federal Reserve [9]Mover Mike

References

   1. http://www.financialsense.com/
   2. http://www.lemetropolecafe.com/
   3. http://www.kirbyanalytics.com/
   4. http://www.ny.frb.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE
   5. http://jessel.100megsfree3.com/TreasuryRpos.jpg
   6. http://technorati.com/tag/Rob+Kirby
   7. http://technorati.com/tag/Kirby+Analytics
   8. http://technorati.com/tag/Federal+Reserve
   9. http://technorati.com/tag/Mover+Mike