David Kotok at Cumberland says the market has ignored the stimulative effects of the Term Auction Facility (TAF). Furthermore, he argues, the fact that the latest auction cleared above the targeted fed funds rate, suggests a healthy recovery in money markets:
Imagine: over $100 billion of nearly 2% money loaned for 28 days directly from the Fed to banks in and out of the United States, and the world’s stock markets ignored it and sold off and the world’s bond markets seemed to ignore it as well.
All three auctions were completed with a bid-to-cover ratio above one. Banks in the three systems (US, Euro, Swiss) collectively bid for $151 billion. That says the demand for dollars continues to be unsatisfied. The final interest rate is below the Federal Reserve’s Discount Window rate of 2.25% but above the Fed’s stated target for Federal Funds (2%). We believe that this is where the auction rate should settle.
The closer the auction stop-out rate gets to the expected Federal Funds rate (OIS), the more the system is showing signs of healing. We believe that the Fed needs to see this on a repeating basis before it launches any attempt to diminish the size of these auctions.
At Cumberland we see this as a form of stimulus. It is causing market interest rates to fall. It is narrowing the spreads between riskless interest rates and risk paper.
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