NEW YORK, Nov 4 (Reuters) - Investors should expect another bout of money market volatility as the banking system's year-end funding crunch approaches and the Federal Reserve has not arrived at a permanent fix for the problem, top bond market players said on Monday.
The Fed was also to slow to respond in the first place to market ructions in September that drove up key interest rates, they said. Cash available to banks for their short-term funding needs all but dried up, and interest rates in U.S. money markets shot up to as high as 10% for some overnight loans, more than four times the Fed's rate.
"I think the pressures will be similar at the end of the year, but the Fed has committed to a pretty big repo facility that they'll deploy faster this time," Anne Mathias, global rates and FX strategist at Vanguard, told the Reuters Global Investment Outlook Summit. "Part of the problem the first time is that it took them a while to get the facility going."
"The Fed made a major mistake here. They weren't listening to the market and were too busy doing the blame game," said Gregory Peters, managing director and multi-sector and strategy head at PGIM, the asset management arm of insurer Prudential Financial Inc.
Since September, the Fed has been pumping tens of billions of dollars of cash injections a day to stabilize a key funding market known as the repurchase agreement, or repo, market. Last month, it increased the daily offering to at least $120 billion and a senior Fed official on Monday said the Fed would adjust its operations as warranted to ensure smooth conditions.
The Fed has also begun buying $60 billion a month of Treasury bills to help replenish the stock of bank reserves, which had fallen too low this fall and proved insufficient at a time when financial institutions' cash requirements were high.
"You have a confluence of balance sheet reduction, financial regulation, tax bills," Mathias said.
Peters said the Fed's actions are providing only limited relief to an entrenched problem.
"The truth is that the structural and regulatory environment isn't helping. Banks are penalized for holding Treasuries," Peters said.
"They will throw money at it, but it doesn't solve the underlying issue. Doing this backdoor (quantitative easing) thing helps on the margin, but the fact they were asleep at the switch is more concerning on a looking-forward basis."
Peters is also concerned that the position of head of market operations at the New York Fed has gone unfilled since becoming vacant following the departure of its long-standing director, Simon Potter.
"The NY Fed is by far the most important institution in the market, and some people who were really well respected have left the building," Peters said.
(For other news from the Global Investment Outlook 2020 Summit, click on https://www.reuters.com/summit/investment20) (Reporting by Megan Davies; writing by Dan Burns; Editing by Dan Grebler)