Statement Regarding Repurchase Operations(newyorkfed.org)
newyorkfed.org
Statement Regarding Repurchase Operations
https://www.newyorkfed.org/markets/opolicy/operating_policy_190920
140 comments
Related: https://news.ycombinator.com/item?id=21029481
Wow this is not good. Repo market is the market of overnight debt between banks. Banks lend money to each other to cover their collateral needs/exposures at the end of each day. If banks lose confidence in each other, they start demanding more collateral from each other in the overnight market, which means the overnight rate goes up. The NYFed is trying to keep interest rates down and is having trouble doing it. As a result, it's having to take some extraordinary measures to the tune of injecting $100b into banks, every night, for the next month. They are basically trying to ensure that no bank gets caught with it's shirt off, while the banks are signaling that they think their peers might be naked.
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
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
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
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?
[deleted]
(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.
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)
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.
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.
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 ...
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.
I don't know that this really makes me personally feel better.
They are screwing over some of the fintechs that provide banking services and use overnight lending to make money on the deposits.
nobody is loosing trust, where are you getting that from? There's just not enough cash at hand so the fed is injecting some. People see doomsday scenarios where there is none
Isn't this just an overnight loan?
30 days * $100 billion = 3 trillion dollars.
Wat.
Seriously, can someone explain what that actually means? Surely there isn't literally 3 trillion dollars moving around...
Wat.
Seriously, can someone explain what that actually means? Surely there isn't literally 3 trillion dollars moving around...
75 billion dollar loans, repaid the next day, for 20 days.
It's 'overnight'. Theoretically the same "atleast $75b" could be used daily.
Thanks. Guess asking a genuine question on HN isn't okay, judging by the downvotes..
So in that situation, the banks are basically in a position where raising their rates (which earns them more) will lead to the feds covering more and more of that? What's to stop them from collectively playing chicken against the feds, while shoveling money into the bag until it becomes ridicules? I mean normally I'd expect a business being close to bankruptcy being told by an investor "This simply cannot happen, I will inject money indiscriminately until you float!!" will start looking for money dumps like buying verbs from CEO's, not opportunities to actually bring the business back in good standing.
What you've described is already happening, just on a global scale. For 10 or more years, whole financial system is just pushing slowly and collectively the lever, knowing that central banks will not allow it to collapse. So as long, as you're not outstandingly fragile, and instead your collapse would mean a collapse of most of similar financial agents, you can always push your risk a little bit higher, forcing your competition to the same.
One thing to note is that $100B is created everyday but the $100B is destroyed the next day. It's not like $100B created everyday for the next month.
That's true. But another way to look at it (not necessarily good), it's like the water in desert. You are in the middle of the desert and you need water - you ask a guy - lend me some water please, I will buy you back the same amount once we are home. Technical speaking, the amount you get and the amount you give back is the same.
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.
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.
You don't have to short it, however, would it make sense to start selling things? Where should money be right now or where should it start going if it is about to hit the fan?
If there truly is a cash shortage to the point that it is threatening bank liquidity, the Fed's likely response would be dropping rates and increasing the money supply with another round of QE.
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.
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.
"otherwise none of the banks we know would exist today"
isn't that a good thing? otherwise they will never learn.
isn't that a good thing? otherwise they will never learn.
Hijacking my own comment. There're rumors that the current shortage of cash is because people in Europe are borrowing massive amount of ultra low rate loans (negative yield) in Europe and turn around to buy U.S. treasuries (higher yield) to do currency carry trade to profit on the yield difference. To buy the treasury bonds, they have to use U.S. dollars so they are soaking up all the excessive dollars out there with their borrowed euros.
I don't think this is true. I trade cross currency basis and if there was excess demand for offshore USD the "basis" (premium over normal rates to borrow USD in return for lending e.g. EUR ) would be moving dramatically. It changed a bit today in response to USD shortage but this seems predominantly a domestic story.
government can borrow at negative rates. i doubt that yooropean joe blow can do that.
I guess that's a fair point. Sorry for oversimplified explanation. So, to attempt to improve on your further clarification: technically it is $75b per night created and destroyed each morning. And 3 separate cycles of $30b will be created for 2 weeks and then destroyed. Therefore $90b injected for 2-weeks then destroyed. Point is this is being injected to help banks cover their overnight exposures with the hope that they won't need the help anymore after Oct 10.
Is there some resource I can look up to better understand what you mean by "destroyed"? Will they be absorbing the value back through financial instruments or how does this "destruction" happen?
They are loans. Money is given to the banks, and then repaid (with interest, but a low rate and short time makes this marginal).
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.
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 writes a check to a bank, the money isn't deducted from an account, it's new money created out of thin air.
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.
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.
Any source to back this statement? I’m curious if fed actually destroyed the money after repayment
literally any macroeconomics textbook. it's the whole point of the fed.
terms to google: "monetary policy", "open market operations"
terms to google: "monetary policy", "open market operations"
This is indeed very important to understand. While overall of course it’s not a bad sign, the Fed is behaving like a _lender of last resort_ for very short term loans. And the situation can also be explained.
Of course it’s not a good sign overall, but there’s no reason to panic.
Of course it’s not a good sign overall, but there’s no reason to panic.
Hoping to clear up some FUD here:
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.”
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.”
> 2) This isn’t $165b. It could be the same $75b used every day.
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?
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?
It might not be happening this time but there are thoughts out there that the era of constant inflation is over. Automation and a sinking or negative growth rate among the top economies will lead to a long phase of economic retraction which is not at all the same as the periodic growth/recession cycle, but a longer term net negative. Many populations of people have a birth rate under the replacement rate and automation is making workers less necessary.
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.
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.
To retry my earlier comment[1]:
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))
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))
> The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9%
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.
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.
> Banks borrowing against Treasuries is almost entirely dictated by liquidity, not solvency.
Can you unpack/explain this claim further?
Can you unpack/explain this claim further?
Solvency = credit risk in this case. If my counterparty doesn't pay me back, I can just liquidate the collateral which in this case are Treasuries. Given that these are overnight transactions, I'm probably not exposed to too much price volatility if I had to.
People aren't worried about getting their money back. There just isn't enough money floating around to lend out.
People aren't worried about getting their money back. There just isn't enough money floating around to lend out.
Why can't I lend banks money overnight for 9% or 8 or 7 or 6.
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 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.
> Why can't I lend banks money overnight for 9% or 8 or 7 or 6
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.
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.
If you had billions to lend you could get access to the market too.
It’s to prevent a cascading failure due to a rapid loss in confidence requiring even greater action from the Fed (such would occur if interbank lending dries up because of counterparty risk [perceived or actual]).
Disclaimer: I work in financial services, but am not involved in these operations.
Disclaimer: I work in financial services, but am not involved in these operations.
I vaguely remember my macroecon class in college so many moons ago. The point is to stop a “contagion” from spreading and causing panic, right?
Essentially. Read about the 2007-2008 GFC [1] to understand how fast the system can break down (weeks). Personally, I find the story of how JP Morgan (the financier) first acted as this sort of national economic backstop in 1907 very interesting and a fun read [2].
[1] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
[2] https://en.wikipedia.org/wiki/Panic_of_1907
[1] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
[2] https://en.wikipedia.org/wiki/Panic_of_1907
im in the middle of the book Crashed, that pretty good explains exactly this in the events of 2008 crash
https://www.amazon.com/Crashed-Decade-Financial-Crises-Chang...
https://www.amazon.com/Crashed-Decade-Financial-Crises-Chang...
So, banks don't trust each other's collateral, but the Fed does, and that judgment is more correct?
[deleted]
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> banks don't trust each other's collateral, but the Fed does, and that judgment is more correct?
The collateral is Treasuries. Nothing exotic.
The collateral is Treasuries. Nothing exotic.
How about all the series of cascading failures due to a rapid loss of housing and healthcare and jobs that are affecting people who aren't bank executives? Who is on top of that one again?
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.
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.
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These are important issues to be solved, but outside of the Fed’s control.
The 2.25% overnight funding rate is the basis for a lot of other rates out there, like the loans the banks lending to the public. The Fed doesn't care about saving the banks a few millions. The Fed cares about setting the short term interest rate for the whole economy.
The target range is now 1.75-2.00 and the Fed also lowered the IOER (interest on excess reserves) 30bp to 1.80%, theoretically to keep the fed funds rate from moving out of the top of the range as happened earlier in the week (fed funds != repo)
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.
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.
> $3.6 million per 1 billion
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.
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.
The relevant figure to look at is borrowing costs per dollar borrowed against typical return on capital. 0.36% shouldn't make a big difference there.
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Your last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets. There is a lot of leverage in repo financed trades and 36bps absolutely does make a difference.
Then maybe you could use your superior understanding to convey the relevant insights, rather than just assert that they exist.
There's no need to get sarcastic about things. If I said at work what you posted about 36bps not mattering I would get fired on the spot. It shows a fundamental lack of understanding of the topic but for whatever reason you are asserting very strong opinions on the topic.
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
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
I explained the basis for my reasoning about the upper bound, on banks, of the impact of the higher effective federal funds rate. I concluded that the size of the impact "shouldn't matter." I don't see how that translates to "very strong opinions" on the topic. Instead, it's an invitation for others to directly address and correct the error in logic.
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. "
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. "
Note how I only focused on your assertion that 36bps "does not make a big difference". That is a strong opinion that is not based on market reality and also has several incorrect assumptions baked into it. Based on continued references to "banks eating the cost", you seem to think that banks are the only ones involved in these transactions. They aren't and not understanding that means that it's very hard to understand the life of a repo transaction. The simple mechanics of a repo transaction are easy to explain but there are a lot of individual parts underlying each transaction. The individual parts sum up to a pretty complex beast that is hard to understand. Reducing this to "can't banks just eat the costs?" is borderline misinformation which does no one any good.
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...
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...
Lookup the size of the overnight markets then apply the 36bps to that figure. That dollar amount is a massive difference for any company.
I think what you are missing is that the bank doesn't own the 1 billion, that is someone else's money (deposit, leverage, etc...). This is very rough estimate, but let's say they are making 1% on the spread in rates (I just made that up, but that feels right, if not high) then using your same calculation they are looking at ~$570k in revenue. If that $570k suddenly turns into a $3.6M loss, that could cause problems.
Additionally, three overlapping 14-day term operations of atleast $30 billion each.
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?
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?
So nice of the Fed to help the banks mark the close of the quarter.
I wish the fed would print some money for me to help pay my student debt
There are presidential candidates essentially promising just that.
I wish I understood what this meant. From my primitive understanding, we have too much money concentrated in too few people trying to make unrealistic returns, so they hold on to it rather than invest it.
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?
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?
From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary dealers having to purchase the difference. They don't purchase USTs from cash on hand. Instead, they use the repo market to fund the purchase. However, the supply of repo market funds is relatively inelastic. Thus, you have a big spike in repo demand with a relatively fixed supply. This was causing the rate spikes we saw. Thus the Fed stepping in as lender of the last resort.
So: Not enough demand for Treasuries, dealers have to purchase the difference, dealers running out of money to keep doing that, the Fed supplying the money for repo. I can buy all that, and it makes me nervous.
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?
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?
It seems to me that the issue is that there has been an increase in supply, because of the massive deficit. This means that there are more US Treasuries for sale than there are buyers. They could sell more by letting the interest rate rise, but that would have major negative effects if a large increase is required.
The increased supply of UST is another contributing factor, yes. Important point AFAICT is the supply inelasticity of repo funds.
> 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?
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.
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.
Every action is an attempt to stimulate positive economic activity by increasing liquidity and decreasing volatility. Despite the various descriptions that can be used they all essentially create money, causing inflation, which incentivizes not holding on to money.
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.
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.
What is the asset banks are so worried their counterparties have on their balance sheets that they need a Fed repo operation?
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.
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.
>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.
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)
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)
This is a reference to Elon Musk's financial strategy, specifically https://www.reuters.com/article/us-tesla-offering-banks/elon...
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
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
This isn’t just Elon, Oracles Founder did the same thing. Except they actually have a company with assets. So I don’t get what OP was rambling on about “non real assets”. A fucking manufacturing plant is an asset. My servers are not. Looks like the financial world is working as it should...
The specific $500M number was a reference to Elon, but yeah, given how successful this strategy is I'm not surprised the Oracle founder uses it too.
I agree with you that these cases are where the companies have tangible, provable value, even if they're not profitable right now.
I agree with you that these cases are where the companies have tangible, provable value, even if they're not profitable right now.
Are you telling me the assets that WeWork owns are not real assets? Well, then, if real estate is not an asset then what qualifies as assets?
>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.
And what might that massive geopolitical conflict be?
And what might that massive geopolitical conflict be?
Hong Kong
Thanks. There could be others. The bombing of Saudi Arabian oil fields and a war with Iran comes to mind. Let's see what the OP had in mind. Maybe it is something else entirely.
It's orthogonal and I'd rather not clutter or derail one of the most interesting threads I've seen on HN, wrt these details of repo operations.
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.
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.
This isn't about counterparty issues. That was Lehman in 2008. This is a systemic liquidity shortage.
>This is a systemic liquidity shortage.
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.
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.
I think we would have other information (rumors, etc) if there were a large bank in trouble and, AFAIK, most repo is tri-party reducing risks further.
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.
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.
Continuing seriously, those $500M for Musk are peanuts to the financial institutions involved.
Bloomberg only gives a few free stories out so choose wisely:
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...
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...
To me it sounds like there is glut in treasuries due to the huge government deficit and there are not enough buyers. This event is the banks not having enough on hand on hand for the treasuries and the corporate tax event at once, so the fed is stepping in to provide temporary liquidity.
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?
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?
Zooming out, here are some points I've been considering:
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.
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.
> Experts seem divided on what's causing the extremely tight overnight liquidity phenomenon
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.
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.
In order for the overnight rate to be within the Fed target range shouldn't the Fed be involved in the market every day anyway?
So if banks are super desperate for Fed funds, but actually have Treasuries to put up as collateral to borrow those funds in the overnight market, why don't they just sell their Treasuries instead, or let them mature, and hold more cash?
Hasn't the Fed for years now been literally paying the banks to do just that with IOER?
Hasn't the Fed for years now been literally paying the banks to do just that with IOER?
NFI what any of it means myself, but it does seem sensible that upcoming Brexit and middle eastern news has a lot of large funds moving around, which might be sufficient reason for extra liquidity to be needed?
Smoke and mirrors and games...
Hey, it's all fun until 14 million people lose their homes again right? /s
My point was purely that this is the financial market playing their usual games again.
I hear you, and my point was that sometimes those games go sideways in a big way.
fed$ git push repo
This is great for bitcoin.
My understanding is that repo trades are 1-day loans collateralized by government bonds. So I don't see how the government is taking any risk here or why it is problematic.
Could you even imagine what we could do with $100B every day?
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.
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.
Well part of the idea is that they get it back pretty quickly. If the fed just gave it all away it would rapidly expand the monetary supply and cause a lot of inflation
Though there is something to be said for longer term QE operations only going through banks rather than through citizens
Though there is something to be said for longer term QE operations only going through banks rather than through citizens
They did rapidly expand the monetary supply and it did cause inflation. Assets are sky high (stocks and real estate). Properties are priced 10-20x cash flow. Stocks are similarly trading at absurd earnings ratios.
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.
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.
QE does not expand the monetary base so it can't cause inflation. It's also not "printing money" as the media likes to call it.
You can't talk about the Japanese asset bubble without talking about the Plaza Accord and the appreciation of the yen.
You can't talk about the Japanese asset bubble without talking about the Plaza Accord and the appreciation of the yen.
When the Fed monetizes assets (QE) it adds to bank reserves (monetary base) AND adds to demand deposits at commercial banks (money supply) that held those assets. Where does the Fed get money to purchase the assets? They create it. Obviously no “printing” is happening it’s on a computer.
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.
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.
QE is neutral to the monetary base. The central bank buys government bonds from banks and pays for them using reserves.
You can see a big spike in the money supply, but there is no corresponding increase in inflation.
You can see a big spike in the money supply, but there is no corresponding increase in inflation.
I downvoted you because that's not what's happening here at all. These are all short term loans, mostly overnight. No one is giving away money.
Banks are there to give capital to businesses, which do solve every single problem from the beginning of capitalism. This is how it works.