End of QE-4: Fed’s Repos Drop Below Oct 2 Level, T-Bills Balloon, MBS Fall, Total Assets Down to Dec 25 Level

Total repos on the Fed’s balance sheet of February 5, released Thursday afternoon, have plunged by $85 billion from the peak on January 1, to $170 billion, below where they’d first been on October 2:

Under these “repurchase agreements,” the Fed buys Treasury securities and mortgage-backed securities (MBS), guaranteed by Fannie Mae and Freddie Mac, or Ginnie Mae, whereby the counterparties commit to buy back these securities at a fixed price on a specific date, such as the next day (overnight repo) or a longer period, such as 14 days (term repo). Repos are by definition in-and-out transactions. When a repo matures and unwinds, the Fed gets its money back, and the repo on the Fed’s balance sheet goes to zero.

By buying these securities, the Fed adds liquidity to the market for the duration of the repo. When the repo matures and unwinds, the liquidity gets drained from the market. When a new repo transaction occurs, the process starts over again, but with a different amount and with a different maturity date.

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