Tag Archives: Repo market

Fed Drains $351 Billion in Liquidity from Market via Reverse Repos, as Banking System Creaks under Mountain of Reserves, by Wolf Richter

Posted on May 21, 2021 | 1 comment

The Fed is reaching the banking system limits of its quantitative easing operation. From Wolf Richter at wolfstreet.com:

This is the first time I’ve seen Wall Street banks clamor for the Fed to back off QE. The Fed is struggling to keep the liquidity it created from going haywire.

In the fall of 2019, when the repo market blew out, the Fed stepped in and bought Treasury securities and MBS and handed out cash via repurchase agreements. When these repos matured, the Fed got its money back, and the counterparties got their securities back. The Fed also did this during the market rout in March 2020. But by July 2020, the last repos matured and were unwound.

Now the Fed is doing the opposite, with “reverse repos.” Repos are assets on the Fed’s balance sheet. Reverse repos are liabilities. With these reverse repos, the Fed is now massively selling Treasury securities to counterparties and taking their cash, thereby draining liquidity from the market – the opposite effect of QE.

This morning, the Fed sold $351 billion in Treasury securities via overnight reverse repos to 48 counter parties, thereby blowing past the brief spike at the end of March 2020, and more than replacing yesterday’s $294 billion in Treasury securities that it has sold via reverse repos to 43 counterparties and that matured and unwound this morning.

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944 Trillion Reasons Why The Fed Is Quietly Bailing Out Hedge Funds, by Tyler Durden

Posted on January 19, 2020 | Leave a comment

Usually financial crises start or quickly accelerate where leverage ratios (the amount of debt speculators take on relative to their equity) are the highest. The impending financial crisis will be no different, which makes highly leverage hedge funds speculating in derivatives markets a potential flash point. From Tyler Durden at zerohedge.com:

On Friday, Minneapolis Fed president Neel Kashkari, who just two months earlier made a stunning proposal when he said that it was time for the Fed to pick up where the USSR left off and start redistributing wealth (at least Kashkari chose the proper entity: since the Fed has launched central planning across US capital markets, it would also be proper in the banana republic that the US has become, that the same Fed also decides who gets how much and the entire democracy/free enterprise/free market farce be skipped altogether) issued a challenge to “QE conspiracists” which apparently now also includes his FOMC colleague (and former Goldman Sachs co-worker), Robert Kaplan, in which he said “QE conspiracists can say this is all about balance sheet growth. Someone explain how swapping one short term risk free instrument (reserves) for another short term risk free instrument (t-bills) leads to equity repricing. I don’t see it.”

To the delight of Kashkari, who this year gets to vote and decide the future of US monetary policy yet is completely unaware of how the plumbing underneath US capital markets actually works, we did so for his benefit on Friday, although we certainly did not have to: after all, the “central banks’ central bank”, the Bank for International Settlements, did a far better job than we ever could in its December 8 report, “September stress in dollar repo markets: passing or structural?”, which explained not just why the September repo disaster took place on the supply side (i.e., the sudden, JPMorgan-mediated liquidity shortage at the “top 4” commercial banks which prevented them from lending into the repo market)…

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Repo Panic Returns As Fed Injects $99BN In Liquidity, Including First Oversubscribed Term Repo In Three Weeks, by Tyler Durden

Posted on January 7, 2020 | 1 comment

Uh oh, the repo crisis is back. From Tyler Durden at zerohedge.com:

And just like that, the repo market is on the fritz once again.

More than two weeks after the last oversubscribed term repo operation on December 16, moments ago the Fed announced that Dealers are once again scrambling for liquidity, submitting $41.12BN in securities ($30.7BN in TSYs, $10.42BN in MBS) into today’s 2-week repo operation, which was oversubscribed hitting the maximum operation limit of $35BN.

Today’s oversubscription was ominous because while the liquidity shortage into year-end was expected, and justified the barrage of term repos ahead of the “turn”, the liquidity shortage was supposed to normalize after the new year. Alas, that appears to not have happened, and today’s submission was the highest since Dec 16.

One reason for today’s repo spike is that as we noted last Friday, this is the first week that sees substantial term repo maturities and liquidity drainage, as follows:

  • $25 billion leaves the market on Monday,
  • $28.8 billion on Tuesday,
  • $18 billion next Friday

But wait there’s more: today’s oversubscribed term repo, coupled with yesterday’s overnight repo surge and this morning’s $63.919BN overnight repo …

… means the Fed just injected a total of $99BN to keep the levitation party going, and confirms that the repo market remains paralyzed.

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Federal Reserve Admits It Pumped More than $6 Trillion to Wall Street in Recent Six Week Period, by Pam Martens and Russ Martens

Posted on January 7, 2020 | Leave a comment

You get the feeling that everybody is holding their breath, hoping the repo market doesn’t blow up, but that it’s going to blow up. From Pam Martens and Russ Martens at wallstreetonparade.com:

If the Federal Reserve was looking for a media lockdown on news about the trillions of dollars in cumulative repo loans it has funneled quietly to Wall Street’s trading houses since September 17 of last year, it could not have found a better cloud cover than Donald Trump. First the impeachment proceedings bumped the Fed’s money spigot from newspaper headlines. Then, this past Friday, as the Fed released its December meeting minutes at 2:00 p.m., with its highly anticipated plans to be announced for the future of this vast money giveaway to Wall Street, that news was ignored as the media scrambled to cover Trump’s “termination” of General Qasem Soleimani, the head of Iran’s Quds Force, which raised the immediate specter of a retaliatory strike against the U.S. by Iran.

The Fed’s minutes revealed that after multiple expansions of this vast money spigot, which was previously set to lapse in January after getting the Wall Street trading houses through the year-end money crunch, instead it may be extended through April. The minutes read as follows:

“The manager also discussed expectations to gradually transition away from active repo operations next year as Treasury bill purchases supply a larger base of reserves. The calendar of repo operations starting in mid-January could reflect a gradual reduction in active repo operations. The manager indicated that some repos might be needed at least through April, when tax payments will sharply reduce reserve levels.”

Corporate and individual tax payments occur every April. The Fed offers no explanation as to why this April is different and requires a multi-trillion-dollar open money spigot from the Fed.

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Shattering the Overton Window, by Robert Gore

Posted on December 27, 2019 | 48 comments

Aim your rocks at glass houses.

The Overton window is the range of policies politically acceptable to the mainstream population at a given time.[1] It is also known as the window of discourse. The term is named after Joseph P. Overton, who stated that an idea’s political viability depends mainly on whether it falls within this range, rather than on politicians’ individual preferences.[2][3] According to Overton, the window frames the range of policies that a politician can recommend without appearing too extreme to gain or keep public office given the climate of public opinion at that time.

CIA Wikipedia

Heaven forbid anyone appear too extreme. Our rulers keep discourse safely within the Overton window by allowing debate about the details of what the government does or doesn’t do. However, those who question the necessity of particular government agencies or programs, or government in general, are beyond-the-pale extremists and cast into the Abyss of the Unacceptable, one zip code over from the Abyss of the Deplorable.

The Federal Reserve has been much in the news lately, The term “repo” is shorthand for a repurchase agreement. The repo market allows those who own securities to sell them to lenders and repurchase them on a set day at a higher price. The difference between the sale and the repurchase price is interest to the lender. The repo market is huge, providing short-term financing for hundreds of billions of dollars worth of transactions daily, primarily in government and agency debt.

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On September 16 the repo market blew up. Short term repos usually carrying interest rates of 1 or 2 percent required rates approaching 10 percent for the market to clear. The Fed stepped in, offering massive fiat credit to push rates back down. It wasn’t just a one-time glitch. Since then, the repo market has required substantial and repeated injections of Fed fiat credit. The Fed has announced injections totaling close to half-a-trillion dollars, or $500 billion, over the next few weeks to prevent the market from seizing up over year-end, when demand for repo financing is traditionally brisk. That will take the Fed’s balance sheet to around $4.5 trillion, the high reached after the last financial crisis.

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The Final Act, by Dmitry Orlov

Posted on December 19, 2019 | 2 comments

Is the repo crisis prelude to market rejection of US government debt at anything close to current interest rate levels such that the Federal Reserve will have to monetize an ever-increasing portion of that debt? Dmitry Orlov thinks so, and he could well be right. From Orlov at cluborlov.blogspot.com:

In processing the flow of information about the goings on in the US, it is impossible to get rid of a most unsettling sense of unreality—of a population trapped in a dark cave filled with little glowing screens, all displaying different images yet all broadcasting essentially the same message. That message is that everything is fine, same as ever, and can go on and on. But whatever it is that’s going on can’t go on forever, and therefore it won’t. More specifically, a certain coal mine canary has recently died, and I want to tell you about it.

It’s easy to see why that particular message is stuck on replay even as the situation changes irrevocably. As of 2019, 90% of the media in the United States is controlled by four media conglomerates: Comcast (via NBCUniversal), Disney, ViacomCBS (controlled by National Amusements), and AT&T (via WarnerMedia). Together they have formed a corporate media monoculture designed to most effectively maximize shareholder value.

As I wrote in Reinventing Collapse in 2008, “…In a consumer society, anything that puts people off their shopping is dangerously disruptive, and all consumers sense this. Any expression of the truth about our lack of prospects for continued existence as a highly developed, prosperous industrial society is disruptive to the consumerist collective unconscious. There is a herd instinct to reject it, and therefore it fails, not through any overt action, but by failing to turn a profit because it is unpopular.”

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Posted in Business, Currencies, Debt, Financial markets, Money, Pensions, Politics

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Repo Men, by the Zman

Posted on December 18, 2019 | Leave a comment

Nobody’s quite sure why the repo market is blowing up, but most people who know about it are quite concerned. From the Zman at theburningplatform.com:

There used to be a time when the mass media covered the Federal Reserve as if it was Hollywood or a professional sports league. Whenever the Fed acted or the Fed chairman made a statement, it was big news. That has not been the case for a long time, mostly due to the mortgage meltdown. Worshiping the money men was no longer good copy after they came close to blowing up the world. Halfway through the Trump tenure, the media barely mentions the Fed or Fed policy.

Still, the central banks remain the most important government institutions on earth and this is particularly true of the Federal Reserve. They control the global economy, because they control the supply of money and credit. This is why the massive intervention into the credit markets by the Federal Reserve recently should be front page news. Something very big is happening and no one seems to know why, but the Fed is responding to it with $500 billion in new money.

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System Failure, by Sven Henrich

Posted on December 16, 2019 | Leave a comment

The repo market’s ructions suggest underlying systemic failure. From Sven Henrich at northmantrader.com:

Rarely has failure been celebrated so much. But it is of little wonder after all, as all asset classes rose in 2019 in spite of slowing growth and flat to declining earnings. In religious debates the question is often asked: Why is there something instead of nothing? In financial markets the corollary question may be easier to answer: Why are markets higher on nothing? The answer of course being primarily: Central bank liquidity.

We’ve discussed the unholy alliance and central bankers being trapped at length, but there is a much more sinister truth lurking beneath, one of system failure suggesting things are not anywhere near as rosy as they may appear.

Indeed, the evidence increasingly suggests the Fed, desperate to fix a leak in the hull, is lighting the whole ship on fire in the process by blowing a historic asset bubble setting markets up to fail and on course for a massive reversion.

Why system failure?

Because 2019 has revealed a fundamental truth: Central banks can’t extract themselves from the monstrosity they have created and made markets dependent upon.

2018 was the only year since the financial crisis that central banks reduced liquidity on a net basis and it blew up in everybody’s face:

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Repo-market turmoil: staring into the financial abyss? by Thomas Malinen

Posted on December 15, 2019 | Leave a comment

The headline is not hyperbole, the repo market situation is certainly serious. From Thomas Malinen at gnseconomics.com:

One thing has been bothering us for six years. How can so many economists and economic commentators dismiss the ever-increasing market meddling of central banks so lightly?

The first time we warned about this possible threat to financial markets was in December 2013. In the report, we wrote:

There is a serious possibility that the measures taken by the central banks have already created a situation in which theiractions increase rather than decrease financial instability. This is due to the fact that if the actual price of an asset does not meet its market–based value, the true level of risk is not properly revealed.

The continuing turmoil in the repo-market, first triggered on 16 September, is the most recent and probably the most worrying example of this.

There has been a lot of speculation about its origins. In this post we explain why we consider the repo-problems to be the first sign, a symptom, of the financial calamity we’re about to face.

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Banana Republic Money Debasement In America, by MN Gordon

Posted on December 14, 2019 | 1 comment

The federal government’s debt growth has reached banana republic proportions. From MN Gordon at economicprism.com:

There are many falsehoods being perpetuated these days when it comes to money, financial markets, and the economy.  But when you cut the chaff, three related facts remain: Uncle Sam needs your money.  He needs a lot of your money.  And he needs it bad!

According to the Congressional Budget Office, the federal budget deficit for the first two months of fiscal year 2020 is $342 billion.  This amounts to $36 billion more than the deficit recorded during the same period last year.  At this rate, Washington’s going to add over $1 trillion to the national debt in FY 2020.

Still, the figures from the CBO aren’t all bad.  Revenues in October and November of 2019 were 3 percent higher than they were in October and November of 2018.  Regrettably, outlays for these two months were 6 percent higher in 2019 than they were in 2018.

Jacks and Jennets both know from experience that taking three steps forward and six steps back is an inefficient way to lose ground.  They also know that the longer this goes on the more ground you lose.  So, too, they know that the more ground you lose the harder it is to make up.

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