The US Fed sees the launch of a repo transaction in early 2020: Deutsche Bank

(Reuters) – The Federal Reserve could launch a lending policy tool for banks using Treasury securities and other securities as collateral early in 2020, with testing likely to begin later this year, a strategist said. Deutsche Bank.

Such a permanent repurchase or reverse repurchase facility would protect against sharp increases in money market interest rates, which occur more and more frequently at the end of the month and the quarter.

"We are reaffirming our expectations that the Fed could test this facility later this year and launch it for large-scale operations early in 2020," Deutsche Bank strategist Steven Zeng said in a published research note. Friday night.

Fed policymakers debated the merit of a repo facility in June. There is no consensus yet on the design of the facility.

Other Wall Street badysts have wondered whether a repurchase agreement was needed when the central bank could end the normalization of its balance sheet and resume its purchases of Treasury securities sooner than expected.

Still, the Fed and the financial markets should benefit from a repo, Zeng said.

For the Fed, such a program could further reduce its balance sheet, currently at $ 3.8 billion, and discourage large banks from stockpiling reserves, which would result in a more equitable distribution of reserves among smaller banks, he declares.

For traders and investors, a repurchase facility could support trading volumes and treasury liquidity by giving banks more flexibility to move between reserves and securities, he said.

Large US banks have focused on, rather than lending, a large portion of excess reserves, partly to meet the liquidity requirements imposed in response to the global financial crisis 10 years earlier.

Increased demand from banks for Treasury securities could help reduce their portfolio. Dealers' need for financing to keep their stocks of Treasury bills contributed to the intermittent rise in free market repo rates, he said.

The Fed may initially set the fixed rate of the facility at 35 basis points above the Fed's interest on bank reserves. The spread could be adjusted up or down, said Zeng.

He said the Fed would allow banks and major traders, or the 24 biggest Wall Street bond companies that deal directly with the Fed, to access pension services.