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By Wolf Richter for WOLF STREET.
On January 9, the Wall Street Journal ran an article about the Fed’s repo operations with this headline: “Fed Adds $83.1 Billion in Short-term Money to Markets.” This is what the headline looks like:he article then said that the New York Fed “added $83.1 billion in temporary liquidity to financial markets Thursday….” And: “The liquidity came in two parts. There was an overnight repurchase agreement, or repo, that totaled $48.8 billion, and a $34.3 billion 14-day repo intervention.”
It said that this $83.1 billion that the Fed “added” on Thursday was up from $46.6 billion it had “added” on Wednesday (so $129.7 billion in two days???).
The WSJ and other media have published similar articles with similar headlines before. It’s part of a larger pattern.
But this WSJ headline & article are a lie about repos.
Neither in the headline nor anywhere in the body of the article does it explain that repos are in-and-out transactions. The headline and the text of the article only mention the “in,” but willfully ignore the “out.”
Here is the “in” of a repurchase agreement: The Fed buys securities (mostly Treasury securities and some agency mortgage-backed securities) in exchange for cash. This adds liquidity to the market.
Here is the “out” of a repurchase agreement: Every repo matures on a set date when the counterparties are obligated to buy the securities back from the Fed at a set price. At this point, the repo unwinds, and it drains liquidityfrom the market.
All repos are by definition in-and-out transactions. When a repo matures, the net goes back to zero (except for a tiny interest payment).
The Fed’s repos fall into two categories: “overnight” repos that mature the next business day; and “term” repos that mature on a specified date further in the future, such as 14 days.
Every business day, the previous day’s “overnight” repo matures. In a week without holidays, five overnight repos mature. Each time one of these repos matures, the original transaction unwinds, the Fed sells the securities back to the counterparties, and takes back in the cash it handed out, and this drains liquidity from the money market.