From Goldman Sachs: “In yet another move designed to unclog financial markets and ease tensions on the credit side, the Federal Reserve has announced an expansion of its securities lending function. It plans to make available up to $200bn in Treasury securities and to accept as collateral a fairly wide range of mortgage-related securities, including: federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. Unlike the curent program, which is mainly overnight loans, the expanded facility (termed the Term Securities Lending Facility), the loans will be available for 28-day terms.
Alongside this announcement, the Fed has expanded wap lines with the ECB and SNB, to $30bn (an increase of $10bn) and $6bn (an increase of $2bn), respectively.
This announcement makes clear that Fed officials are pulling out all stops they can think of to deal with financial stress through the increased provision of liquidity into the system. To the extent they see this as substituting for rate cuts, this should reduce the probability (which we have regarded as low all along) of a 75bp rate cut next Tuesday. A 50bp rate cut remains the most likely option on March 18.”
From Bank of America: “This addresses many of the financing issues for private label MBS. It does not address the capital shortfall in the system, or the risk in the underlyingsecurities. But, since it is likely to substantially lower financing costs for AAA rated MBS, it will improve the carry on these securities and make positions a bit easier to hold. Odd structure addresses some of the restrictions on the Fed owning private label MBS. Basically, the dealer gives the Fed MBS collateral, the Fed gives back Treasury collateral, and the dealer pays a rate determined by the auction. Since these will be term loans, some Tsy collateral will get tied up in the auction, and we may see a bit more quarter-end specialness in some issues.”
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