Reuters - It is pretty consistent with the Fed trying to be more creative with inter-bank lending markets tightening up since the beginning of January. The increasing of the term repos and also the increasing of the size of the TAF are consistent with a Fed trying to ease credit conditions. Also there were rumors today that the Fed might outright buy Fannie Mae and Freddie Mac securities, which was also putting pressure on the bond market, along with the narrowing of swap spreads and agencies. (Under the new facility) they can also buy the high-rated corporates and things like that. One of the things they are trying to accomplish is not just to increase liquidity but also decrease the risk premium on non-Treasury securities. There is a feeling that if they keep on doing things like this they could influence the pricing mechanism and also ease credit conditions. A lot of agency securities are illiquid not just because they are afraid to sell them -- at least the Fed is giving some sort of window to dump these things.
Join the Discussion