While the majority was focused on the widely expected 0.25% rate hike yesterday, yours truly was more interested in the billions to trillions move on the Fed’s reverse repurchase program (RRP):
“…Most notably, the Fed said it was lifting the daily cap on its reverse repurchase program to around $2 trillion, from its current $300 billion…”
Yellen’s RRP intent is to guide rates higher:
“…[Yellen] can overpay a larger pool of intermediaries on the repo market (RRP)…”
Even though our intent differs, we can adapt Yellen’s innovation as a template for financing the Sustainable Development Goals (SDGs). In the past we pointed out that:
“…There are three features of financial markets that are relevant to infrastructure today:
1.Long term finance is probably dead due to regulations like Basel III and Solvency II
2.Credit insurance is probably dead too after the demise of mono-line insurers
3.Despite what the private sector claims, the public sector is still the elephant in the room, providing us with more than 80% of infrastructure finance…”
In short, to gain wide market acceptance, we need debt instruments that are:
1. Short-term (as opposed to long-term)
2. Credit enhanced by long-term collaterals (as opposed to credit insurance)
3. Public-sector (as opposed to private-sector)
The Fed’s RRP fulfils all of the above. However, the collaterals in the 2 trillion Fed’s RRP are US Treasuries. Yours truly trust that the developmental banks can probably help make the leap into infrastructure collaterals by introducing a well-defined securitization program with the objective of making long-term infrastructure debt fungible.
Good luck in the markets.