Thursday, September 18, 2008

Fed Borrows $100 Billion From Treasury

Treasury Department announced today that it is auctioning a total of $100 billion in bills to boost the Fed's liquidity programs.  This is IN ADDITION to the $100 billion it announced yesterday (updated with correct information.)  The good news is that the Treasury is still considered a good enough credit to allow it to borrow money for free.  Yesterday's auction of $40 billion of 35-day bills had a stop-out rate near zero.  Today's two auctions of $30 billion 20-day bills and $30 billion in 76-day bills (see update below) also had stop-out rates of .10% and .25% respectively.  The bad news is that it implies that investors are hoarding treasuries and avoiding nearly every other money market instrument (see related story below on money markets.)  According to the Wall Street Journal, the US commercial paper market shrank by $52 billion in a week and rates have soared.  What are the implications of this?  Any company that has to issue CP to fund their operations may run into liquidity problems.  The Fed releases its balance sheet this afternoon which will provide an interesting insight into how much the Fed's holdings have changed in the past week.

Update:  The $30 billion in 20-day cash management bills auctioned today had a stop out rate of 0.10% and was three times oversubscribed.  Gulp! 

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