Statement Regarding Repurchase Operations
newyorkfed.org
newyorkfed.org
What you're describing is an increase in "haircuts" in these transactions between banks, but I haven't heard anyone report that has been happening. It has been, more simply, that too many people are showing up with bonds and want cash and too few people are showing up with cash and want to lend it. So the interest rate has risen
And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that
Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only explanation I can think of is that some of the lenders believe that some of the creditors are about to default
No idea how accurate that is as a characterization, so someone help out via Cunningham's Law.
They are still trying to figure it out.
However, this doesn't happen every year, or even every quarter ... so ...
An increase in ON repo was expected but the magnitude of it was not. What makes the most sense is that there was a large amount of leverage that was dependent on rolling ON repo financing. Reserves are not as abundant as thought due to various financial regulations and also are not evenly distributed. The distribution matters a lot because some desks that may have been more ready/able to lend may not have had the reserves and I guess vice versa.
The problem is that (apparently) there are few lenders in a position to give up reserves to fund other participants bond holdings. Balance sheets, required reserves, excess reserves etc are all pretty complex post 2008.
I don't know how to link to an earlier comment I posted in another thread this morning but summarize:
-Treasury took in an additional 80+ -goal of having 350B cash on hand by quarter -probably single biggest cause for liquidity issue
-most of the collateral posted to the Fed has been Treasuries and less so mortgages.
-financial system/world runs on repo and it is troubling this is happening at all.
-Did Mnuchkin orchestrate this to force the Fed into backdoor easing through another round of QE? My guess, yes.
(QE is where Fed buys treasuries and other debt consequently injecting cash into the system)
I don't know that this really makes me personally feel better.
Wat.
Seriously, can someone explain what that actually means? Surely there isn't literally 3 trillion dollars moving around...
Of course it’s not a good sign overall, but there’s no reason to panic.
The fact that the money is "created" and "destroyed" is the nature of the Fed. They don't need to have money in order to lend it. That's what the Fed is.
These loans are literally the same as printing money, loaning it, collecting the loans, and destroying the printed money. Except everything is just numbers on a balance sheet, so no physical money needs to be physically printed or shredded. The effect is still the same: The Fed decides that money should enter the money system, and also describes how that money will leave the money system.
when the fed receives a check from a bank, the money doesn't get deposited and stored in some account, the money just stops existing.
terms to google: "monetary policy", "open market operations"
What happened during the last crisis is also a great illustration - many banks took taxpayers money during the 'dark hours' then paid it back easily some time later, when the air cleared. Some went as far as to suggest it wasn't necessary at all. Well, the truth is, the banking system as we know it survived only thanks to governments stepping in - otherwise none of the banks we know would exist today. There was 0 trust during the crisis - and all the banking system is build on trust.
That's why the FED is "taking a sledgehammer to squash a bug". That's also why it's a very disturbing signal. My gut tells me shit is about to hit the fan.
PS. But don't try to time the market and short it - as the saying goes, the market can stay irrational longer than you can remain solvent.
If that happens, you should be buying, not selling, since QE basically acts as a subsidy for equities as institutions seek yield with cheap money.
isn't that a good thing? otherwise they will never learn.
1) This is the financial equivalent of taking a sledgehammer to squash a bug. Financial markets operate largely on confidence, and especially the rule that the Fed is the lender of last resort at their specified Fed Funds Rate (now 25 basis points lower as of Wednesday).
2) This isn’t $165b. It could be the same $75b used every day.
3) No, this isn’t a sign of a healthy market, but bond prices especially in Europe have gone bananas the past few months and we could be in the biggest bond bubble of our generation. This was evident in negative yields as also a very quick yield curve inversion in the U.S. for 2y10s.
4) I personally believe some banks were over levered as bond prices began to unwind this week and got caught with their pants down.
5) I think the Fed is using this sledgehammer approach to allow some banks to unwind and de-lever their bond positions safely and orderly over the next 2 weeks.
6) I said #5 about 11 years ago, but I believe “this time it’s different.”
I made the $165b comment, my understanding is that there's four overlapping liquidity injections (three 14-day operations and the recurring overnight operation). Would this not be 30 + 30 + 30 + 75?
Zoom out and it could be the first phase of the transition from capitalism to a post-scarcity economy which would look very much different.
Obviously that is a lot of speculation, but there are going to be all sorts of population peak points which are going to pass in the next 20-30 years and it's really hard to believe economic growth can continue or even ever happen again with a steadily shrinking global population.
When you pack smart successful people into cities like rats and have them paying half their income to live in a few hundred square feet they just won't have babies. They have to work too hard for too little and don't have interest in places with more space because the job market doesn't want to leave the cost-efficiency of the city.
The effect is that populations are going to shrink until cost of living becomes cheap enough for people to want to afford the luxury of working less and raising children.
I am honestly in that position myself at the moment. I am of the age and life situation where it should be time to start having children but I don't want to because I can't afford it despite being in the top X percentile of income because I want to live in a decently sized space less than 30 minutes away from my work.
The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9%.
Over three weeks.
That means banks are, at most, saved from having to pay an (extra) interest charge of $3.6 million per 1 billion (revolving) dollars borrowed. [2]
That ... still seems like a rounding error against their typical quarterly profits, considering it's a one-time anomalous event.
Is that really something that justifies extreme Fed measures?
[1] https://news.ycombinator.com/item?id=21000023
[2] computed from 1,000,000,000(1.09^(3/52) - 1.025^(3/52))
Disclaimer: I work in financial services, but am not involved in these operations.
[1] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
https://www.amazon.com/Crashed-Decade-Financial-Crises-Chang...
All the homeless people who live near me have started using the nearby car wash as their toilet, which is making the whole neighborhood smell pretty awful as everyone refuses to deal with this problem.
I'm so glad Wells Fargo does not have to worry about it's margins shrinking by less than a percentage point so that they can continue generating $250 million in profit per day.
The collateral is Treasuries. Nothing exotic.
How many of those billions are being borrowed?
The Fed is putting up $165 billion to help the market. So we can assume the market is at least that large.
If we use your 3.6 million per billion figure, that's $600 million.
Of course, the fed isn't the entire market, so we're probably talking a rescue worth several billion dollars. Hardly a rounding error.
ON repo usage outside of FICC [1] members is quite often used to finance leveraged low margin transactions. Given information provided so far and what has been observed in the markets, one of the common theories of what caused ON to spike is Treasury basis [2] trades. Given the magnitude and speed of the ON spike and current positioning [3], this theory makes a lot of sense. If this is one of the causes, a spike in ON absolutely matters and isn't just a rounding error.
[1] https://www.investopedia.com/terms/f/ficc.asp [2] https://www.cmegroup.com/education/courses/introduction-to-t... [3] https://www.cftc.gov/dea/futures/financial_lf.htm
You, for your part, are conveying very strong opinions on the topic and asserting that you understand it well. But, the first time around, you made a cryptic reply that focused more on calling me ignorant [1] than on pinpointing the error in my model.
When I referred to your superior understanding, that was not sarcasm; that was taking your assertion at face value. I recognize that others may know more about this. One implication of having superior understanding is the ability to make better contributions contributions to the discussion than calling someone ignorant [1] and asserting that a small RoR matters because leverage.
But rather than address the specific error your believe exists, you made an orthogonal claim, obscured with jargon you didn't define (like "ON").
To clarify, my original assertion was that, even if banks had to absorb the entire extra cost of the higher interest rates, that would still be small compared to their return to capital. Do you disagree with that? Is there another mechanism by which the higher borrowing costs translate into higher costs throughout the economy? If so, what is that mechanism?
If you have the superior understanding you claim to, then answering those questions is how you can refute the model I presented, and it should be easy with such an understanding. But telling me that your work buddies think I'm stupid -- that does not add to the discussion.
[1] "Your last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets." Later, you said, "If I said at work what you posted about 36bps not mattering I would get fired on the spot. "
I previously gave a trade example that is a likely cause (or something similar) of the market events that transpired this week. It's a good example of how 36bps matters (my original point of contention). The NY Fed has a very good guide to the repo markets [1]. Hope these help.
[1] https://www.newyorkfed.org/medialibrary/media/research/staff...
Personally, I think they need to return to the days when excess reserves were paid no interest at all. Unfortunately that would remove order 40B in free money money center banks have been booking the past few years.
Lender of last resort is one of the most essential roles of the Federal Reserve. Banks borrowing against Treasuries is almost entirely dictated by liquidity, not solvency.
Can you unpack/explain this claim further?
People aren't worried about getting their money back. There just isn't enough money floating around to lend out.
There wouldn't be a liquidity problem if the market for the overnight funds wasn't restricted in the layers and layers of abstraction of the financial systems.
There are two kinds of money: central bank money and private money. Central bank money consists of accounts at the Federal Reserve and hard cash. (Your checking account contains private money.)
The repo market concerns itself with borrowing and lending central bank money (a/k/a "reserves"). Given the only way you could do this is with hard cash, and given borrowing and lending hard cash is quite expensive to manage, particularly overnight, you aren't in a competitive position to participate in this market.
Adding it together we can see the fed is going to be providing a minimum of $165B in total liquidity to the market while all the operations are undergoing.
Curious how this will play out in the long term. Are we going to add even more liquidity when these operations end?
Does this move mean that the fed is trying to keep its benchmark rate too low and absent market forces it would be much higher?
How close are we to a failed auction where the dealers won't or can't purchase the difference? How close are we to the Fed having to buy them directly?
In theory this affects all equally but in practice and in agreement with recent memory, losing X% of a small amount to inflation or wage stagnation (i.e. what you or I experience) is more negatively impactful than a large player losing that same relative amount.
Fed used to maintain a corridor system, in that they would intervene if effective fed funds went higher or lower than their target. They moved to a floor system, in which they attempted to set a single rate by paying banks interest on reserves (IOER) held at the Fed. For roughly a decade, this worked (a certain arbitrage helped convert this rate from a floor into a ceiling). Recently, effective fed funds has risen above IOER, but Fed was not conducting reverse repo operations to push this down.
Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said CEOs stock in a private company that has negative cash flow and no real assets, which he also happens to control? Surely there is no reason to doubt the quality of collateral like that.
But more seriously, legit question is what do the banks know about each other that the financial press hasn't reported yet?
Personally I think the Fed is keeping interest rates down to defuse a massive geopolitical conflict that is closer to blowing than anyone realizes, but that doesn't explain why banks are worried about getting stiffed by each other.
As a startup CEO with available stock, an actual positive cash flow and no _real_ assets.. please tell me where I can apply for this type of loan? Because all the loans I'm looking at are 3-8% interest and requires me to sign over my personal assets as collateral in return for a paltry $250k. I'd rather use that loan to just buy more real assets for myself instead (which is what I am doing)
Essentially, he has almost nothing in cash, and instead of selling stock to raise cash he borrows money with his stock as collateral. This is why he's so monomaniacally focused on his stock value and public image.
For a more professional, but login-walled, overview, see https://www.economist.com/business/2016/10/22/countdown
Let me keep reloading and smash esc until i get it to load without the paywall.
I agree with you that these cases are where the companies have tangible, provable value, even if they're not profitable right now.
And what might that massive geopolitical conflict be?
I'm still of the mind that liquidity in effect means, "no buyers or participants," because banks have doubt about the stability of their counterparties - with the possibility that liquidity just isn't available at a suppressed interest rate. Even though the Fed rate and the overnight rate are different beasts, I'm asking by assertion whether the Fed rate is affecting the overnight rate, which is causing the liquidity problem because of the underlying idea banks are worried about what's on their counterparties balance sheets and they aren't compensated for it in the overnight rate.
I shouldn't have included the startup joke, as I think that clouded it.
I'm suggesting the liquidity problem is an unexpected knock on effect of the fed rate suppression due to the geo issue that forced their hand on low rates. The geo issue I was thinking of has been deferred for the moment, but for this discussion, the real question is whether there is a domestic issue where the banks are worried about each others stability.
If competent people are sure it's just Q3 taxes and an artifact of the business cycle, this thread is still really valuable.
To say it's a play by Mnuchin to kick start another round of QE would be consistent with the geo issue, but we're well into wagging the dog conspiracy stuff at that point.
That seems to be the consensus, but I'm not convinced. $75B is tiny compared to the amount of excess reserves in the banking system and compared to the size of the overall repo market. Yet the Fed is treating this as an urgent matter. My guess is that there is a single (or a small number) of banks that are having a liquidity problem and the Fed is trying to stop it from becoming a broader issue.
Another reason I feel this is not a single name problem is that the spread of FF to IOER had been rock stead until 2018 when FF began to trend from -15bp to parity/+5bp. So this pressure has been around awhile now.
https://www.bloomberg.com/quicktake/the-repo-market
https://www.bloomberg.com/news/articles/2019-09-18/powell-se...
https://www.bloomberg.com/news/articles/2019-09-18/overnight...
https://www.bloomberg.com/news/articles/2019-09-16/repo-mark...
Is it possible, or are we close to to where the banks (or other buyers) won't be able absorb the glut in treasuries themselves, and the fed has to buy them, effectively monetizing our deficits?
1. A repo intervention on this scale hasn't happened since the 2008 crisis.
2. Experts seem divided on what's causing the extremely tight overnight liquidity phenomenon.
3. The Fed refused to budge from its tepid stance on long-term rates and restarting QE in its recent meeting. This stands against a backdrop of a stagnating world economy, the collapse of foreign sovereign bond yields, and unprecedented browbeating from the White House.
Divided on root cause, but not on its seriousness. Quarterly tax payments on the same day as a massive Treasury issuance amidst a Eurodollar carry trade that yields more, for longer, than the overnight markets. Nothing related to the soundness of the financial system.
Hasn't the Fed for years now been literally paying the banks to do just that with IOER?
My god. They just sit down at the keyboard and print money out of thin air and electrons and give it to any of the 20 biggest banks who ask for it.
We could literally solve every single problem.
Though there is something to be said for longer term QE operations only going through banks rather than through citizens
Does anyone remember https://en.wikipedia.org/wiki/Japanese_asset_price_bubble ?
Massively expanding credit to the point where money is free .... reduces the value of money. But denial is a helluva drug.
You can't talk about the Japanese asset bubble without talking about the Plaza Accord and the appreciation of the yen.
When the Fed buys the assets they add credit, giving the banks more than they need in reserves. Banks then seek to make a profit by lending that extra money, thus “stimulating” the economy.
The whole point of QE is increasing liquidity by increasing the supply of money.
You can see a big spike in the money supply, but there is no corresponding increase in inflation.