Friday, March 28, 2008

Crunching the TSLF Numbers

(FT Alphaville) “Shocking soft bidding” was how one analyst put it.

But how much to read into the relative lack of interest by brokers in the first auction via the new Term Securities Lending Facility? Dealers submitted $86bn in bids - to swap a range of nasty MBS collateral for Treasuries - in the $75bn auction. The lowest rate accepted by the Fed - or stop-out rate - was 33bp.

That put the pricing of the auction only 8bp above the minimum, notes David Merkel at Aleph. The auction was close to failing; except in this case, failure would have been a good thing. Direct lending, through the Fed’s Primary Dealer Credit Facility rose modestly, with loans outstanding to dealers up to $37bn, from $29bn the week before.

So excellent news then. Dealers are not as desperate for funds as we all thought. But, cautions Michael Cloherty at Bank of America, there may also be technical factors at work here in generating the surprising low TSLF result. He writes:

In the TSLF, dealers are limited to putting on two bids per auction, and for most repo traders this was their first experience with a single-price auction (Fed repo auctions are multi-price). Going into the auction, the market consensus was a rate of around 90bps (a 90bps fee plus Treasury GC of 1.60% would have put the all-in cost of financing private label MBS or CMBS at 250bps, equal to the discount rate). While this is highly speculative, we would not be surprised if a number of dealers burned both of their bids for small pieces of collateral close to the expected 90bp clearing level, and did not save one for a substantial back-stop bid. We presume this is why there was only $86.1bn of total bids, and why the stop-out crashed to 33bps.

Beware the signal from the TSLF data. But be wary also of drawing too much inference from repo rates over the next few days, he adds.

977.jpgDealer volumes in Treasury repo collapse over the ends of quarters. And that is traditionally cushioned by the four dealers with November year-ends expanding their activity to take advantage of price dislocations. The demise of one of those, Bear Stearns, will deflate that cushion somewhat this time round.

This quarter, compression in activity is likely to be far above the norm, says Cloherty. So dislocations are likely to be extreme through to the end of the month.

But after that, we expect normalcy should begin to return.

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