Aug. 10 (Bloomberg) -- The Federal Reserve added $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.
The Fed accepted securities with a credit quality of mortgage-backed debt or higher as collateral for today's weekend repurchase agreement, which was about double the average daily amount this year. The central bank also announced a second weekend repo agreement. Losses in U.S. subprime mortgages have been rippling through global credit markets, driving interest rates higher and sinking share prices. The Fed added $24 billion yesterday, the most since April, as demand for cash rose.
The New York Fed's additions lowered the Federal funds rate to 5.375 percent, according to ICAP Plc, after it began trading at 6 percent, the highest open since January 2001. The Fed's benchmark overnight rate is currently 5.25 percent.
``It looks like this will be enough to address the problem today because of the pace at which the funds rate moved down,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. ``It's not an extraordinary amount but large.''
Fed funds traded above the central bank's target for a second straight day. The Fed's benchmark was 6 percent the last time fed funds opened at today's level. On average, the Fed has added about $9 billion in temporary funds to the system each business day this year. The Fed said it also accepted Treasuries and so-called agency debt as collateral in today's operation.
Treasuries pared their gains after the addition today. Stocks dropped worldwide on speculation losses in mortgage debt will hurt economic growth and earnings.
Rate-Cut Speculation
The European Central Bank today loaned 61.05 billion euros ($83.6 billion), pumping funds into the banking system for a second day. The ECB added an unprecedented 94.8 billion euros yesterday.
Some banks may experience ``unusual funding needs,'' the Fed said in a statement from Washington. The Fed's discount window is open and the central bank pledges to provide liquidity, the Fed said.
Some traders were speculating yesterday that the Fed will cut rates at an emergency meeting as soon as next week, according to a Merrill Lynch & Co. report published yesterday.
Interest-rate futures for August show investors see the chances of a quarter-point reduction in the Fed's key rate on any day from Aug. 16 at higher than 50 percent, Merrill strategists Joseph Shatz and Stanley Sun wrote in the report.
Countrywide Financial Corp., the biggest U.S. mortgage lender, said it faces ``unprecedented disruptions'' that may reduce profit, suggesting a credit crunch that started with the U.S. subprime market will spread.
`Special Demand'
The New York Fed accepted $19 billion of securities in today's repurchase agreement, of $31.2 billion submitted.
The central bank probably received only mortgage-backed debt in today's operation, said Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. The central bank likely wanted to avoid taking Treasury debt at a time when government securities are in demand as a safe haven, he said.
``The Street has special demand for the highest-quality Treasury collateral right now, so the Fed chose to leave Treasury collateral,'' Crandall said. ``It should not be taken as a sign that basic Fannie Mae and Freddie Mac mortgage pools are difficult to finance.''
The Fed typically only accepts so-called agency mortgage- backed securities, such as those guaranteed by government- chartered Fannie Mae or Freddie Mac, rather than non-agency home- loan bonds from other financial institutions. Issuance and trading of non-agency bonds, including securities backed by subprime mortgages, has ground to a near-halt the past month.
Overnight Rates
Overnight euro rates again rose to as high as 4.27 percent today, compared with the ECB's benchmark rate of 4 percent.
Fed funds, the U.S. overnight interbank lending rate, closed at 4 15/16 percent yesterday, after trading between 4 3/4 percent and 5 3/4 percent, and averaging 5.38 percent, according to ICAP Plc, the world's largest inter-dealer broker.
In repos, the Fed buys U.S. Treasury, mortgage-backed and so-called agency debt from its 21 primary dealers for a set period, temporarily raising the amount of money available in the banking system. At maturity, the securities are returned to the dealers, and the cash to the Fed.
Repos help maintain enough money in the system to keep overnight interest rates close to the central bank's target. They don't signal a policy shift.
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