The Federal Reserve’s rebuild of money market liquidity is pointing to a quiet turn of the quarter, market participants say, as ample central bank cash depresses the volatility that often emerges around such calendar dates.

Market Expectations

Heading into the quarter-end, market participants do not see market pressure growing in a way that would point to a spasm of interest rate volatility and a surge in use of central bank liquidity facilities. “I expect normal turn-of-the-quarter pressures but nothing disruptive,” said Lou Crandall, chief economist with research firm Wrightson ICAP.

The month-end often brings short-lived bouts of money market churn as some market participants pull back, which can then pressure rates upward and drive various market players to either park cash at the Fed’s reverse repo facility or borrow from the Fed via repo operations. Those pressures are frequently strongest at quarter-end as firms manage their respective balance sheets.

Fed’s Technical Effort

But this time, as was the case at year-end and at the close of March, the Fed is adding cash to the market as part of a technical effort to manage money market conditions, to ensure it retains firm control of its interest rate target range and to allow for normal market volatility.

The Fed has been buying $10 billion in Treasury bills per month, down from $40 billion per month at the end of last year, as part of its reserve management purchases. BMO Capital Markets strategists believe the Fed will stick with $10 billion per month in Treasury bill buying into late summer.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.