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 merits of a pension facility in June. There is no consensus yet on the design of the facility.

Other Wall Street analysts have wondered whether a repo transaction would be possible in the near future, when the central bank could end the normalization of its balance sheet and revive its treasury bill purchases sooner than planned.

"Our basic scenario remains for this facility to be finally implemented, but we believe that it may take longer than expected – towards the third quarter of 2020 – given the differing views of the participants on the parameters", writes Steve Kang, Citi Research Strategist Note.

Nevertheless, the Fed and the financial markets should benefit from a repo, said Zeng of Deutsche Bank.

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. The need for merchants to finance their stocks of treasury bills has 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 interest it pays 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.