Thread by @Barton_options

My takes on today's FOMC minute.

1. POMO shifting from T-bill to 2Y UST: 70% chance to be implemented by mid March.

Once executed, it will have a moderate risk-on impact for equities more so than Tbill POMO

Shorter-duration = 1-2Y UST, which is clogging up PDs book

This POMO shift to 1-2Y UST functionally = the QE Pozsar talked about repeated in Dec. In theory, it should

1. recover the safety margin of the reserve balance for US GSIBs
2. prevent credit from being crowded out on GSIBs' book.

POMO is likely to drop to baseline (organic) levels ($8-12Bn/month) in May or June.

Overall this move by the Fed is mildly risk-on.

2. Repo: the keyword is "gradually".

The average Fed Repo balance in the last 6 trading days is $230.7Bn, which can be replaced by $60Bn POMO in ~4 months

Overall bank reserve level will be relatively stable (+/- $30Bn) in the next 4 months.

POMO replacing Repo is a mild tail wind to risk assets, since bank reserve gained via POMO cost 0% to banks, while Repo cost at least O/N RRP rate.

Acute impact of the drop in repo provision should be felt around 1/17, when Fed repo becomes fully subscribed again. But because of ongoing POMO, this won't be a shock to the system.

Term repo is likely to be ended by EOM Feb.

Before panicking, one needs to take into account the fact that ~$110Bn liquidity is expected to come out of TGA in Jan.

3. IOER/ONRRP rate hike.

5bps rate hike in some of the future FOMC meeting perhaps. probably 2 hikes over 6 months. it does not materially affect much except for the money market.

4. Rate cut for Foreign repo pool

This should release another $40-60Bn of liquidity over the next few months.

TL,DR: Dec FOMC minute is mildly supportive for risk asset, as in Fed continues to provide more and cheaper liquidity into 2H of April 2020.

I'd love to see equity market to freak out next week though. 🤣🤣

Zero Edge is working hard on that.