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Comment by spiantino | Hacker News Reader

I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted.

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

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Why is there such a liquidity crunch though?

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

Quarterly taxes seems to have been the initial cover story. My guess is it ties back partially to the eurodollar carry trade. There is an unprecedented amount of international rate and currency arbitrage going on which has pulled US dollars out of the US and could easily manifest unintended macroeconomic consequences like this. One day repo is easy for the Fed to address but if it persists then it becomes a confidence issue and people to start wonder: is this just the tip of the iceberg? If the underlying cause really is a systemic imbalance of sufficient magnitude, then who knows what else could pop up. It's more likely to signal major problems in the economies that are importing dollars (Europe in particular but also Asia) than the US itself, but a meltdown is bad for everyone; this uncertainty may be what some traders are starting to hedge against.

This is an interesting line of thought, could you expand and simplify your explanation a bit for people who are not as familiar with the dynamics you're talking about?

(not a finance guy) - what I was told when the Fed did this on Monday/Tuesday was that there was a perfect storm where businesses had way more withdrawals from their accounts than deposits (taxes + payroll iirc) which led to a situation where banks didn't have the cash on hand for the repo market and minimum balance required by statute. But that doesn't explain why the Fed is doing this over the next few weeks.

No idea how accurate that is as a characterization, so someone help out via Cunningham's Law.

That makes some sense as Monday was the deadline for Q3 federal taxes. However this should of course be something that is expected and factored into banking operations so there must be some other factor no?

Recommend a google news search and pick one of the Bloomberg stories (they limit how many you can read for free).

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)

Psst...you can easily keep reading Bloomberg, just keep opening articles in incognito windows.

Few thoughts:

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.

I read that the cause was that companies were taking money out to pay their quarterly taxes.

Wouldn’t that be a regular occurrence and thus non-news? Is everyone looking for recession fear mongering material?

Sept 15 was tax day. Companies withdrew money they had in the market to pay taxes. It is a regular occurrence every year, but this year it was a problem because the FED tightened. They assumed 1 trillion would have been enough but now are looking for the correct amount buy adding money.

They are still trying to figure it out.

The headline says they're conducting repo operations until Oct 10 which is 3 weeks out, so obviously it's something more that just quarterly tax payments.

The reason why they're doing that is because they need to restore confidence to the market. The absolute worst thing the Fed could do is do what they did this week, say everything is all good, and then something even worse happens in the near future.

That seems like a good, easily digestible bit of news to send to the public "ah, got it, I understand paying taxes".

However, this doesn't happen every year, or even every quarter ... so ...

Supply inelasticity. https://news.ycombinator.com/item?id=21028982

Shades of LTCM.

You’re right. Thanks for this comment. It’s really helpful. I’m still wondering what the factors are that created this gap. If financial institutions aren’t losing confidence in each other or the assets that are been posting as collateral, why is there a cash shortage in the overnight market?

Aren't the haircuts and interest rates just flip sides of the same coin, though? You can express risk in either language, and if either is rising that means that the evaluation of risk has risen too.

I don't know that this really makes me personally feel better.

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