By Michael S. Derby 

The New York Fed embarked on its first round of Treasury bill buying Wednesday aimed at expanding its overall holdings, and found no dearth of interest from banks wanting to sell securities to the central bank.

The New York Fed said it bought $7.501 billion in Treasury bills as part of its efforts to expand its balance sheet to deal with changes in the economy and the financial system's liquidity needs. Dealers submitted $32.569 billion in offerings. There had been some worry among market participants that the Fed might not find all the Treasury bills it wanted to buy.

The central bank also injected $75 billion in overnight liquidity into financial markets on Wednesday. That came via one-day overnight repurchase agreements with eligible banks. The banks had offered the Fed $80.35 billion in securities. The Fed took in $72.592 billion in Treasurys and $2.408 billion in mortgage-backed securities.

In recent temporary operations, the banks dealing with the Fed utilized less liquidity than the central bank was willing to offer. But some observers noted Tuesday was a day of pressure for short-term markets due to the settlement of Treasury debt auctions, which can affect reserve levels in the banking system.

On Tuesday, short-term rates drifted upward. The effective fed-funds rate, which is market-based, hit 1.90% for the first time since the end of September, putting that rate somewhere near the top end of the 1.75% to 2% range set by the Fed. The Fed-published Broad General Collateral rate, which tracks the cost of short-term securities lending, also moved up, hitting 1.96% on Tuesday, from 1.82% Friday. Monday was a market holiday. And the Secured Overnight Financing Rate, which the Fed is pushing hard as a replacement for the scandal-plagued Libor benchmark, hit 2% Tuesday, from 1.85% on Friday.

Fed repo operations take in Treasury and mortgage securities from eligible banks in what is effectively a one-night loan of central bank cash, collateralized by dealer-owned bonds. Last month, the Fed ramped up its repo operations for the first time in over a decade to help tame spiking short-term borrowing costs.

Those operations have been largely successful. But central bankers have also sought a more enduring fix for what appears to be a shortage of reserves in the banking system, so last week the Fed announced that it would begin growing what is a $3.9 trillion balance sheet via purchases of up to $60 billion a month of Treasury bills through the first half of next year.

The Fed also said then that its temporary interventions would continue alongside efforts to permanently grow the balance sheet.

The Fed stressed that expanding its holdings of bonds and cash via Treasury bill buying is purely technical and not intended to serve as a form of stimulus, as bond buying was during the financial crisis and its aftermath.

The ample supply of Treasury bills offered to the Fed Wednesday cheered some observers. "The challenge for the Fed might be finding enough willing sellers over time," although there was clearly enough selling interest on the part of dealers as the buying effort begins, said Oxford Economics in a note to clients.

Last Friday, the Fed also announced a series of multi-day repo operations that will run over coming weeks. The next 15-day repo intervention will take place on Thursday.

Write to Michael S. Derby at michael.derby@wsj.com

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

October 16, 2019 14:29 ET (18:29 GMT)