The federal reserve stepped into financial markets for a second day on Thursday, sharply increasing its asset purchases amid turmoil over the coronavirus.
The New York fed issued a statement on its Treasury reserve management purchase and repo operations.
The New York fed will carry out repo operations and purchases, a $500 billion three-month repurchase of bonds of all maturities at 13:30 a.m. Edt, a move that would extend purchases beyond treasuries.
The New York fed said in a statement earlier on Thursday: “these changes are in response to the highly unusual disruption in Treasury funding markets associated with the coronavirus outbreak.” Before that, Wall Street was having its worst day since 1987.
As part of the statement, the fed expanded its $60 billion bond-buying programs, which is currently limited to short-term Treasurys.
Under the new regime, the fed will expand its purchases of short-term bonds, medium-term bonds, tips, and other instruments’ across a wide range of maturities. ‘ The fed will start buying interest-bearing bonds, something market participants have been demanding since late 2019.
The purchases began on Thursday and will run through April 13.
In the second part of the new operation, the New York fed will provide $500 billion in three-month and one-month repurchase operations, which will be fixed weekly.
In addition, the fed will continue to provide at least $175 billion in overnight repurchases and $45 billion in two-week operations. Repo is a short-term operation in which financial institutions provide high-quality collateral in exchange for cash reserves to be used for operations.
Markets have been extremely volatile because of the uncertainty over the spread of the coronavirus. Earlier this week, government bond yields fell to record lows on reports of liquidity problems and fears of a global recession.
Markets have been expecting the fed to act. Last week, the fed cut interest rates on the sidelines of meetings, but the move failed to calm market fears. The fed raised the ceiling on its ongoing repurchase operations on Monday, then on Wednesday, and announced the issuance of a $50 term note that had attracted a lot of interest earlier in the day.
At the same time, the fed also pledged to “adjust the terms of operations as needed to facilitate the smooth functioning of the Treasury market and the effective implementation of the policy.”
The dollar index DXY fell 90 points to 97.44 after the fed’s latest news. Non-us currencies were mostly higher, with the us dollar/Canadian dollar falling more than 100 points in the short term, while the euro/us dollar and sterling/us dollar rising more than 70 points.