fed auction thing goes well

the fed helped to liquefy $75 billion in securities today by offering that amount of its $650 billion of treasury holdings to the nation's 20 primary dealers in exchange for so-called schedule 2 collateral, which includes agency collateralized mortgage obligations, AAA/Aaa-rated private-label residential mortgage-backed securities, AAA/Aaa-rated commercial mortgage-backed securities, as well as collateral eligible for the tri-party repurchase agreements that are arranged regularly in the fed's daily open market operations.

by obtaining treasuries in exchange for such collateral, dealers can then put the securities out on repo, which is to say that dealers can then exchange the treasuries for cash with any willing counterparty, of which there are many more than for the other types of collateral, as bsc obviously learned recently.

the urgency to participate in today's operation on the surface does not appear to have been all that strong. in other words, dealers did not show any signs of being desperate to liquefy collateral much beyond what was available, as evidenced by the bid/cover ratio of 1.15. in addition, the fee rate paid by dealers for the lending service was just 0.33%, or 8 basis points, above the minimum. the premium appears to reflect normal gaming of the auction and not much else.

additional info on the street's urgency to swap collateral for treasuries will be apparent in today's release of money supply data, which will include a figure on the fed's new primary dealer credit facility, which was the facility used in the bsc deal.

the amount of new borrowing that will appear in today's data is expected to be small, similar to the increase in discount-window borrowing that occurred in the aftermath of the fed's cut in the discount rate last august. only a few dealers likely tapped the window, with the tally no more than in the low billions at most.

this first go-around indicates that the fed may not need to auction all of the $200 billion in securities it has allotted for the TSLF.