Spike in Repo Rates [Fed Overnight Repurchase agreement]

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skepticalobserver
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Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by skepticalobserver » Tue Sep 17, 2019 12:11 pm

Thoughts on the recent spike in overnight Repo rates? How may this effect (or not) hypothecation of retail investor securities, particularly treasury holdings?

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Re: Spike in Repo Rates

Post by willthrill81 » Tue Sep 17, 2019 12:12 pm

I'm not even remotely concerned.

There's no way on earth that I would adjust anything in my portfolio on the basis of this information.

Do you have a link to data for this?
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Re: Spike in Repo Rates

Post by skepticalobserver » Tue Sep 17, 2019 12:16 pm

willthrill81 wrote:
Tue Sep 17, 2019 12:12 pm
Do you have a link to data for this?
https://www.bloomberg.com/opinion/artic ... nd=premium
Last edited by skepticalobserver on Tue Sep 17, 2019 12:18 pm, edited 1 time in total.

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Re: Spike in Repo Rates

Post by 7eight9 » Tue Sep 17, 2019 12:16 pm

willthrill81 wrote:
Tue Sep 17, 2019 12:12 pm
I'm not even remotely concerned.

There's no way on earth that I would adjust anything in my portfolio on the basis of this information.

Do you have a link to data for this?
Fed runs repo Tuesday amid worries about keeping its benchmark rate in check --- https://www.cnbc.com/2019/09/17/fed-to- ... ts-it.html

Repo Market Chaos Signals Fed May Be Losing Control of Rates --- https://www.bloomberg.com/news/articles ... -in-months
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Re: Spike in Repo Rates

Post by willthrill81 » Tue Sep 17, 2019 12:18 pm

skepticalobserver wrote:
Tue Sep 17, 2019 12:16 pm
willthrill81 wrote:
Tue Sep 17, 2019 12:12 pm
Do you have a link to data for this?
https://www.bloomberg.com/opinion/artic ... nd=premium
The implications of this move are open to interpretation. For those who see doomsday around the corner, “this time the funding squeeze could have dire consequences for not only the economy but the market.” For those with a bit more tempered attitude, like Thomas Simons at Jefferies LLC, “it’s difficult for the dealer community. But it’s not systemically threatening.”
Image
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Spike in Repo Rates

Post by RetiredAL » Tue Sep 17, 2019 12:34 pm

willthrill81 wrote:
Tue Sep 17, 2019 12:18 pm


Image
+1 several times over to the image.

Ignore the "might/could" news stories. They generally have little correlation to actuality.

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Re: Spike in Repo Rates

Post by Broken Man 1999 » Tue Sep 17, 2019 12:38 pm

Within the overall economy, there are always different parts doing better, and also doing worse, no matter the current state of the economic cycle.

A case could be made for most likely tens of outcomes when examined in isolation. Thing is, the economy has a lot of moving pieces, and is subject to changes in those moving pieces, not to mention the influence the different pieces have on each other, such that predictions of the direction of the economy are darn near impossible to be made with much accuracy.

For every "positive sign a recession is near", there are plenty of signs contradicting that point to "economy is in great shape, no sign of a recession."

Unfortunately, such info tends to spook some investors into withdrawing from the market to "keep/ lock in their gains", possibly missing out on continued out-sized gains.

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Re: Spike in Repo Rates

Post by threadripper » Wed Sep 18, 2019 5:05 am

I too was interested on the perspective of those present here on just what this meant in the grand scheme of things. Based on the initial responses, I’m getting the vibe that this wasn’t a big deal or a more ominous sign of some other impending doom...?

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Re: Spike in Repo Rates

Post by awval999 » Wed Sep 18, 2019 5:48 am

Literally thought we were going to be talking about car repossessions.

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Re: Spike in Repo Rates

Post by Jack FFR1846 » Wed Sep 18, 2019 6:16 am

awval999 wrote:
Wed Sep 18, 2019 5:48 am
Literally thought we were going to be talking about car repossessions.
Wait......we're not?
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Fed Repo operation

Post by Tahoe » Wed Sep 18, 2019 9:24 am

[Thread merge into here, see below. --admin LadyGeek]

Hello,

I’m reading this morning about the fed’s decision to perform a “repo operation” overnight to lower intrabank rates, which apparently spiked. Despite reading a few articles stuffed with technical jargon, I’m still having trouble understanding why this is happening. Is anyone able to translate into laymen’s terms why this is happening now (for the first time in a decade)?

Thanks!

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Re: Fed Repo operation

Post by Dottie57 » Wed Sep 18, 2019 9:30 am

Tahoe wrote:
Wed Sep 18, 2019 9:24 am
Hello,

I’m reading this morning about the fed’s decision to perform a “repo operation” overnight to lower intrabank rates, which apparently spiked. Despite reading a few articles stuffed with technical jargon, I’m still having trouble understanding why this is happening. Is anyone able to translate into laymen’s terms why this is happening now (for the first time in a decade)?

Thanks!
I read about this on CNN yesterday and it makes me queasy. The article on CNN says that there is no real understanding of why this is happening. Article also likened it to quantitative easing. Now feeling worse.

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Re: Spike in Repo Rates

Post by petercooperjr » Wed Sep 18, 2019 9:35 am

I read Matt Levine's "Money Stuff" each day, as it's a wonderful and humorous summary of what's going on in the world of finance. He had this to say yesterday, under "Repo": (I'm hoping that quoting the whole thing here is okay.)
The way the U.S. financial system works is, companies set aside a little money from their profits each day to pay taxes at the end of the quarter, and while they wait they park the money in money-market funds. And then the money-market funds use the money to make overnight loans to banks, who use it to buy U.S. Treasury bonds, or who lend it to hedge funds who then use it to buy Treasuries.

That is not a complete description of how the financial system works! Really it is only a couple of small strands of it. But the thing is, the whole thing is made up of strands. Every day, there is more or less an auction in which banks bid for overnight access to idle money—money that investors and companies are keeping in short-term cash for whatever reason, including to pay their near-term bills, including their tax bills—so that they can use that money to fund their Treasuries.

The clearing price in this auction—the price to borrow money overnight, secured by Treasury bonds—is more or less “the interest rate.” I mean, there are lots of interest rates, but the overnight-secured-by-Treasuries rate is a particularly atomic one: There is a big deep liquid market for it, it is effectively risk-free, and it is the shortest practical interest rate so you can build a term structure on top of it. And so a couple of overnight-lending-against-Treasuries rates are important, and used as references for other things, and one will probably replace Libor as the standard U.S. dollar interest rate for floating-rate loans and derivatives, and they tend to be correlated to each other and to other important rates like Federal Funds.

[content in excess of copyright fair use removed by admin LadyGeek]

Anyway you know who has a lot of money and a long view? The Fed, which announced this morning that it “will conduct an overnight repurchase agreement (repo) operation from 9:30 AM ET to 9:45 AM ET today, September 17, 2019, in order to help maintain the federal funds rate within the target range of 2 to 2-1/4 percent.”

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Re: Fed Repo operation

Post by ReformedSpender » Wed Sep 18, 2019 9:36 am

In a nutshell, primary dealers who are forced to buy an issuances by law are seeing reserves drained (high demand for cash) and thus those dealers who would normally fund a higher repo rate don’t have the funds to lend. Ultimately, this means the federal reserve has a decision to make, fund this deficit spending by TOMO, temporary open market operations, or POMO (permanent) i.e more Quantitative easing.
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by LadyGeek » Wed Sep 18, 2019 9:41 am

I merged Tahoe's thread into the ongoing discussion.
Jack FFR1846 wrote:
Wed Sep 18, 2019 6:16 am
awval999 wrote:
Wed Sep 18, 2019 5:48 am
Literally thought we were going to be talking about car repossessions.
Wait......we're not?
So did I - the thread has been retitled. :)

Here's a deep-dive direct from the NY Fed: Treasury Repo Reference Rates
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Valuethinker » Wed Sep 18, 2019 9:50 am

skepticalobserver wrote:
Tue Sep 17, 2019 12:11 pm
Thoughts on the recent spike in overnight Repo rates? How may this effect (or not) hypothecation of retail investor securities, particularly treasury holdings?
Here's my guess.

Oil prices were up 20% although that settled down to +10% on Monday, following the attack on the Saudis.

That would have caused an almighty short squeeze on those who had bet against oil price rises - either producers or those with oil inventories hedging or speculators. That's a very big daily (weekend) move for one of the world's largest traded commodities.

That would have caused a need for cash *now* as players cashed out of their positions.

It also triggered something of a "risk off" move so that could have applied to lots of risk assets, not only oil.

That might have caused a flutter in money markets.

It's too early to get worried but it's another sign that 10 years after the Global Financial Crisis, and 8 years after the Eurozone debt crisis, the financial system is still quite (over) extended, and that there are lots of pockets of excess even if none of them individually seems to be large enough to cause another crisis.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by gmaynardkrebs » Wed Sep 18, 2019 10:06 am

Could this mean a freeze-up in my Vanguard MM funds could happen?

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Re: Fed Repo operation

Post by Wind_Reaver » Wed Sep 18, 2019 11:28 am

gmaynardkrebs wrote:
Wed Sep 18, 2019 10:06 am
Could this mean a freeze-up in my Vanguard MM funds could happen?
Maybe the jump in repo rates will finally make Federal MM funds attractive[?] The Federal MM funds have been underperformers of the new lot since money market reform.
Dottie57 wrote:
Wed Sep 18, 2019 9:30 am
I read about this on CNN yesterday and it makes me queasy. The article on CNN says that there is no real understanding of why this is happening. Article also likened it to quantitative easing. Now feeling worse.
CNN has to say that. Pay no attention to CNN (or any of the legacy networks).

Repo has been a persistent issue since the GFC over a decade ago, this isn't new.
Image

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Valuethinker » Wed Sep 18, 2019 11:35 am

skepticalobserver wrote:
Tue Sep 17, 2019 12:11 pm
Thoughts on the recent spike in overnight Repo rates? How may this effect (or not) hypothecation of retail investor securities, particularly treasury holdings?
https://www.motherjones.com/kevin-drum/ ... po-market/

Kevin Drum is not a finance guy, but he's very data driven & level headed. Even his discussions of his cancer treatments are level headed, data driven & complete with graphs of his blood tests.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Valuethinker » Wed Sep 18, 2019 11:40 am

Valuethinker wrote:
Wed Sep 18, 2019 9:50 am
skepticalobserver wrote:
Tue Sep 17, 2019 12:11 pm
Thoughts on the recent spike in overnight Repo rates? How may this effect (or not) hypothecation of retail investor securities, particularly treasury holdings?
Here's my guess.

Oil prices were up 20% although that settled down to +10% on Monday, following the attack on the Saudis.

That would have caused an almighty short squeeze on those who had bet against oil price rises - either producers or those with oil inventories hedging or speculators. That's a very big daily (weekend) move for one of the world's largest traded commodities.

That would have caused a need for cash *now* as players cashed out of their positions.

It also triggered something of a "risk off" move so that could have applied to lots of risk assets, not only oil.

That might have caused a flutter in money markets.

It's too early to get worried but it's another sign that 10 years after the Global Financial Crisis, and 8 years after the Eurozone debt crisis, the financial system is still quite (over) extended, and that there are lots of pockets of excess even if none of them individually seems to be large enough to cause another crisis.
EDIT

And FT's Alphaville thinks I am on the right track (I found this post via a link from Kevin Drum at Mother Jones. His commenters are often quite well informed)

https://ftalphaville.ft.com/2019/09/17/ ... r-crunch-/
Alphaville has one highly speculative theory, which we invite more informed readers to scrutinise and debunk if needs be. (Although, our readers never require much invitation.)

We previously argued Monday’s oil price spike constituted a pretty unprecedented state of affairs and could conceivably lead to a lot of fallout for those caught on the wrong side of the move — evidence of which would only come to light in the days to come.

So one theory is that a dash to post variation margin at the respective commodity exchanges (and in cleared bilateral markets as well) is in some ways feeding through to a funding shortfall in repo markets.

As we noted previously, a lot of the buyside were likely caught short due to the seemingly popular theory that the trade war would lead to a slowdown in oil demand.

Even if such funds closed down their positions entirely, yesterday’s move was so large it is more than likely initial margins might have been blown through entirely, leaving many exposed to raising the difference owed to the exchanges elsewhere (under legal obligation).

But the other bigger theory is that the strikes have taken out approximately $400m in daily dollar cash income for the Saudi government. That income equals dollar liquidity the Saudis suddenly no longer have access to. Their dollar spending commitments, however, go unchanged. If commitments to pay salaries and suppliers can’t be met by (what were until now fairly predictable) cash injections from oil sales, the only other option for the Saudis is to start liquefying their dollar asset reserves . . . and that, very likely, is something to be conducted through the repo markets directly.

In which case repo markets may be moving in anticipation of Saudi liquidity operations
— in the context of a market that’s already being over supplied in terms of safe government bond assets relative to available bank reserve liquidity — or as a result of them already taking place.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by UpsetRaptor » Wed Sep 18, 2019 11:46 am

Will, that chart is awesome.
:sharebeer

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Re: Spike in Repo Rates

Post by Hector » Wed Sep 18, 2019 11:52 am

willthrill81 wrote:
Tue Sep 17, 2019 12:18 pm
skepticalobserver wrote:
Tue Sep 17, 2019 12:16 pm
willthrill81 wrote:
Tue Sep 17, 2019 12:12 pm
Do you have a link to data for this?
https://www.bloomberg.com/opinion/artic ... nd=premium
The implications of this move are open to interpretation. For those who see doomsday around the corner, “this time the funding squeeze could have dire consequences for not only the economy but the market.” For those with a bit more tempered attitude, like Thomas Simons at Jefferies LLC, “it’s difficult for the dealer community. But it’s not systemically threatening.”
Image
Not that I am going to do anything about it. But looks like we are in a massive boom since 2009. I hope that we don't experience losses similar to subprime crises era. When was the last time we experienced 16%/year return from us stock market for 10 years?

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Re: Spike in Repo Rates

Post by Dottie57 » Wed Sep 18, 2019 12:50 pm

Hector wrote:
Wed Sep 18, 2019 11:52 am
willthrill81 wrote:
Tue Sep 17, 2019 12:18 pm
skepticalobserver wrote:
Tue Sep 17, 2019 12:16 pm
willthrill81 wrote:
Tue Sep 17, 2019 12:12 pm
Do you have a link to data for this?
https://www.bloomberg.com/opinion/artic ... nd=premium
The implications of this move are open to interpretation. For those who see doomsday around the corner, “this time the funding squeeze could have dire consequences for not only the economy but the market.” For those with a bit more tempered attitude, like Thomas Simons at Jefferies LLC, “it’s difficult for the dealer community. But it’s not systemically threatening.”
Image
Not that I am going to do anything about it. But looks like we are in a massive boom since 2009. I hope that we don't experience losses similar to subprime crises era. When was the last time we experienced 16%/year return from us stock market for 10 years?
We will see a recession and a bear market in the future , we just don’t know when. The Great Recession was created by bad business practices in loans, with risk being transferred from party to party and a gambling casino mentality on Wall Street.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by ray.james » Wed Sep 18, 2019 3:14 pm

https://www.newyorkfed.org/markets/opol ... cy_190917a

They injected another 75 billion yesterday evening in addition to 53 billion on Monday night.

edit: still media is sensationalizing saying since 2008, but 2008 is when the money market funds broke.
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Re: Spike in Repo Rates

Post by willthrill81 » Wed Sep 18, 2019 3:40 pm

Hector wrote:
Wed Sep 18, 2019 11:52 am
Not that I am going to do anything about it. But looks like we are in a massive boom since 2009. I hope that we don't experience losses similar to subprime crises era. When was the last time we experienced 16%/year return from us stock market for 10 years?
Why are you limiting your analysis to 2009 and the last 10 years? Back up your dates a bit, and the 'boom' doesn't look that way at all. Since 2000, U.S. stocks have returned 3.61% real. That's far from what most investors would call good. A big part of the reason that the last 10 years' returns have been so good is because the prior 10 years' returns were so terrible. Over the entirety of that period, U.S. stocks have significantly underperformed their historic average (barely over half). But if you extend the analysis to the last 30 years (i.e. 1990-current), real returns (6.98%) have been very close to their historic average (about 6.8%).

All the talk we've heard of late regarding predictions that stock returns will be 3-4% real over the next decade shouldn't be too surprising to anyone because that's exactly where we've gotten over the last ~20 years.

Also, returns have not averaged 16% for the last decade. Since 2009, U.S. stocks have had a real return of 11.89%. Compared to history, that's very good, but it's very far from unprecedented. From 1990-1999, the real return was 13.94%.
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Re: Spike in Repo Rates

Post by Cochese » Wed Sep 18, 2019 6:01 pm

willthrill81 wrote:
Wed Sep 18, 2019 3:40 pm

All the talk we've heard of late regarding predictions that stock returns will be 3-4% real over the next decade shouldn't be too surprising to anyone because that's exactly where we've gotten over the last ~20 years.

Also, returns have not averaged 16% for the last decade. Since 2009, U.S. stocks have had a real return of 11.89%. Compared to history, that's very good, but it's very far from unprecedented. From 1990-1999, the real return was 13.94%.

One of the best posts I’ve seen here in a while.

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Re: Fed Repo operation

Post by Phineas J. Whoopee » Wed Sep 18, 2019 7:04 pm

ReformedSpender wrote:
Wed Sep 18, 2019 9:36 am
In a nutshell, primary dealers who are forced to buy an issuances by law are seeing reserves drained (high demand for cash) and thus those dealers who would normally fund a higher repo rate don’t have the funds to lend. Ultimately, this means the federal reserve has a decision to make, fund this deficit spending by TOMO, temporary open market operations, or POMO (permanent) i.e more Quantitative easing.
Primary dealers are not forced by law to buy. They make a commitment to submit competitive bids at each Treasury auction, and can abandon primary dealer status whenever they believe it will help their business, or for that matter, whenever they please.

They only applied for primary dealer status because they believe it will, on the whole, help them, not harm them.

PJW

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Spike in Rates

Post by Chicken Little » Thu Sep 19, 2019 6:12 am

[Merged here -- mod oldcomputerguy]

https://www.cnbc.com/2019/09/18/fed-los ... -good.html

Everything fine? Ignore? Bury head in sand?

Thanks

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Re: Spike in Rates

Post by Sconie » Thu Sep 19, 2019 6:31 am

Just more noise IMHO. As Jack always said, "stay the course!" :wink:
I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant. - Alan Greenspan

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Re: Spike in Rates

Post by firebirdparts » Thu Sep 19, 2019 6:32 am

Here's our thread on it:
viewtopic.php?f=10&t=290684
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Re: Spike in Rates

Post by vineviz » Thu Sep 19, 2019 6:48 am

Chicken Little wrote:
Thu Sep 19, 2019 6:12 am
https://www.cnbc.com/2019/09/18/fed-los ... -good.html

Everything fine? Ignore? Bury head in sand?
Yes. Yes. And yes.
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Re: Spike in Repo Rates

Post by firebirdparts » Thu Sep 19, 2019 6:54 am

Hector wrote:
Wed Sep 18, 2019 11:52 am
Not that I am going to do anything about it. But looks like we are in a massive boom since 2009. I hope that we don't experience losses similar to subprime crises era. When was the last time we experienced 16%/year return from us stock market for 10 years?
There was a previous massive boom from (pick your own starting date) 1985 to 2000, with nominal returns over 16%. Then (in retrospect) zero% for a decade. Then boom for a decade. FWIW.

Retrospect is a lot different from life. The decade of 2000 to 2010 didn't seem flat. It was a roller coaster. It looks flat now if you make longer charts.

What causes these big moves in the market is investors. (ha ha).
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Oicuryy » Thu Sep 19, 2019 9:52 am

For those who want to watch overnight rates.
Image
https://fred.stlouisfed.org/graph/?g=nFRK

More info here.
https://apps.newyorkfed.org/markets/autorates/sofr

Ron
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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Angst » Thu Sep 19, 2019 11:07 am

Oicuryy wrote:
Thu Sep 19, 2019 9:52 am
For those who want to watch overnight rates.
[Snip...]
https://fred.stlouisfed.org/graph/?g=nFRK

More info here.
https://apps.newyorkfed.org/markets/autorates/sofr

Ron
Thank you for the links, I hadn't seen this before. I do wish the rates data went back farther than May 2018.

[Edit]

Now wait just a minute here - the data show essentially no change in volume during this rate spike. But all the proposed explanations I've read about in this thread for this rate spike (including both a somewhat unusual alignment of treasury refunding dates and the oil supply shock d/t Saudi Arabian facility attack) sound like they're based upon increased demand (volume). What am I misunderstanding here?

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Re: Spike in Repo Rates

Post by Chicken Little » Fri Sep 20, 2019 5:10 am

willthrill81 wrote:
Tue Sep 17, 2019 12:18 pm
Image
So ahead of today's $75 billion repo...

https://www.breitbart.com/economy/2019/ ... ng-friday/

...my question would be;

Are there different classes of events?

For example, are the BP oil spill, Japanese earthquake, Ebola fears, and Brexit potentially different from perhaps the flash crash, taper tantrum, and certainly the 2008 financial crisis in which the financial system was essentially broken? It's easy to understand how the former could impact the economy or stock prices. What is more difficult for me to understand is how threats to the machine itself arise, and then what that risk specifically is? What is particularly concerning for me is that the experts are in the midst of trying to understand why these repos are necessary.

I just grabbed the first reference I saw, but their throwaway conclusion is;

The most popular theory on Wall Street is that the Fed’s earlier balance sheet reduction has left the market with too few dollars relative to Treasuries held by financial institutions.

Again, it's a little disconcerting that we appear to have to rely on theories for explanation. Beyond that, if we were to entertain this particular explanation, wouldn't it imply that the Fed can't unload it's balance sheet?

The 2008 financial crises has become rather quaint in retrospect. It was scary, but if you didn't lose your job or were caught with too much house that you needed to unload, you came out nicely ahead. We all seemingly understand exactly what happened now, which belies the fact that nobody really understood what was about to happen back then. When events like these unanticipated repos happen, I think people are fairly conditioned to wonder if the system is broken.

Is the system broken? It was broken a while ago, was it ever really repaired? When it breaks, does anyone know how to fix it? Total debt (government, corporate, credit, student etc.), Fannie & Freddie massively levered, negative interest rates, QE4. Is there a difference between a major economic shock to a sound financial system and a relatively minor shock to a broken system?

Is it broken?

I'm not even remotely ready to ask what to do about it, if there were even anything to do. However, I do feel entitled to know what this system is doing with my money even though I realize I'll probably never have a sufficient explanation.

gjlynch17
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Re: Fed Repo operation

Post by gjlynch17 » Fri Sep 20, 2019 5:46 am

Wind_Reaver wrote:
Wed Sep 18, 2019 11:28 am
gmaynardkrebs wrote:
Wed Sep 18, 2019 10:06 am
Could this mean a freeze-up in my Vanguard MM funds could happen?
Maybe the jump in repo rates will finally make Federal MM funds attractive[?] The Federal MM funds have been underperformers of the new lot since money market reform.
I do not believe this has had an impact on Treasury or Federal Money Market Funds but it definitely has had a (positive so far) impact on some Prime Money Markets who I understand are lenders in the Repo markets. Through my linked Fidelity Cash Management Account I am an investor in Fidelity Money Market Premium (FZDXX) which is equivalent to Vanguard's Prime Money Market (VMMXX). Generally, VMMXX yields 10-15 basis points more than FZDXX, approximately the difference in expense ratio. However, this week, FZDXX, which had a 7-day yield of 1.97% and trending downwards, spiked to 2.05% or above, equivalent to VMMXX. VMMXX inched upwards a couple of basis points and currently has a 7-day yield of 2.06%. From this and the daily liquidity numbers (FZDXX had a dip to 15% earlier this week), it appears that FZDXX was an active lender in the Repo market this week. VMMXX may have been as well but it is harder to tell and if so, it was much smaller.

I am not sure if this is anything other than a short-term blip and I am not taking any action other than enjoying the temporary higher yields from FZDXX. FZDXX is still safely above the 10% daily liquidity limit in which it can impose restrictions on redemptions and I would be shocked if Fidelity would actually do so if it ever fell below 10%, especially considering that it allows FZDXX as cash management fund. However, I am grateful that Vanguard offers low-cost Treasury and Federal money markets for greater liquidity and tax-equivalent yields as FZDXX.

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Spike in the Repo rate: what does it mean?

Post by CULater » Fri Sep 20, 2019 11:08 am

[Thread merged into here, see below (next page). --admin LadyGeek]
As if the U.S. Federal Reserve did not already have enough on its plate heading into its meeting on interest rates this week, chaos deep inside the plumbing of the U.S. financial system has thrown policymakers an unexpected curveball.

Cash available to banks for their short-term funding needs all but dried up earlier this week, and interest rates in U.S. money markets shot up to as high as 10 per cent for some overnight loans, more than four times the Fed's rate.

That forced the Fed to make an emergency injection of more than $125 billion over the past two days, its first major market intervention since the financial crisis more than a decade ago, to prevent borrowing costs from spiraling even higher. While the effort restored a measure of order to the short-term bank funding market, it was not enough to stop the Fed's benchmark lending rate from rising this week above its targeted range of 2.00 per cent to 2.25 per cent.
https://www.cbc.ca/news/business/what-s ... 1.5289518

I've heard some comments that the short term interest rate controlled by the Fed may be getting out of control and could spike higher. I don't understand this or what to expect. Anybody know? Would argue for being very short in your bond holdings, including TIPS.
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Re: Spike in the Repo rate: what does it mean?

Post by Valuethinker » Fri Sep 20, 2019 11:35 am

CULater wrote:
Fri Sep 20, 2019 11:08 am
As if the U.S. Federal Reserve did not already have enough on its plate heading into its meeting on interest rates this week, chaos deep inside the plumbing of the U.S. financial system has thrown policymakers an unexpected curveball.

Cash available to banks for their short-term funding needs all but dried up earlier this week, and interest rates in U.S. money markets shot up to as high as 10 per cent for some overnight loans, more than four times the Fed's rate.

That forced the Fed to make an emergency injection of more than $125 billion over the past two days, its first major market intervention since the financial crisis more than a decade ago, to prevent borrowing costs from spiraling even higher. While the effort restored a measure of order to the short-term bank funding market, it was not enough to stop the Fed's benchmark lending rate from rising this week above its targeted range of 2.00 per cent to 2.25 per cent.
https://www.cbc.ca/news/business/what-s ... 1.5289518

I've heard some comments that the short term interest rate controlled by the Fed may be getting out of control and could spike higher. I don't understand this or what to expect. Anybody know? Would argue for being very short in your bond holdings, including TIPS.
The best way to understand this is as a technical problem in money markets, rather than signs of serious trouble.

Thus it distorts short term interest rates but NOT longer term rates. It's an argument to avoid ST money markets (and to some extent bond markets) rather than an argument to be in them.

My own thought - which FT's Alphaville also had - was that it was the result of frantic short covering by people who had shorted the oil price and then been caught out by the volatility after the attack on the Saudis last weekend. Commenters seemed not to believe that story, pointing instead to widely understood issues in money markets.

So "move on, nothing to see here". I would not change my asset allocation strategy in response to this. And you can bet the Fed is all over this - hence the injection of liquidity.

However
Commander #1 : We've analyzed their attack, sir, and there is a danger. Should I have your ship standing by?

Governor Tarkin : Evacuate? In our moment of triumph? I think you overestimate their chances.
The problem of European financial institutions being dependent upon the Fed for US dollars, is not resolved, as I understand it. It was a key, unheralded, part of the measures that the Fed undertook in EDIT 2008 2009 to keep financial markets from imploding - supplying dollars to European financial institutions.

So the REPO rate can also function as a fear index - a sign that there are more financial institutions out there that need cash, than those willing to lend it.

It does not seem that this is what is going on this time, but there might come a moment when it's flashing red again, and the problem really is a flight to safety.
Last edited by Valuethinker on Sat Sep 21, 2019 9:37 am, edited 1 time in total.

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Re: Spike in the Repo rate: what does it mean?

Post by Tyler Aspect » Fri Sep 20, 2019 11:38 am

I read that due to a timing situation many major market players all need to tap very short term credit, and the credit ran low. Federal Reserve Bank of New York has been tasked to keep this situation under control.
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Re: Spike in the Repo rate: what does it mean?

Post by Chicken Little » Fri Sep 20, 2019 2:53 pm

Valuethinker wrote:
Fri Sep 20, 2019 11:35 am
It was a key, unheralded, part of the measures that the Fed undertook in September 2018-March 2019 to keep financial markets from imploding - supplying dollars to European financial institutions.
Can’t seem to even recall this one.

What is the acceptable number of times for the Fed to have to “keep financial markets from imploding.”

Maybe the actionable part is to ask for financial markets that aren’t as prone to implosion?

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Re: Fed Repo operation

Post by Wind_Reaver » Fri Sep 20, 2019 6:49 pm

gjlynch17 wrote:
Fri Sep 20, 2019 5:46 am
I do not believe this has had an impact on Treasury or Federal Money Market Funds but it definitely has had a (positive so far) impact on some Prime Money Markets...
Should affect most MM funds. Federal MM funds allocate primarily to a combination of Agency, Repo, and Treasury securities. Most Treasury MM funds are actually Treasury+Repo funds. Vanguard and Schwab have two of the few Treasury MM funds which minimize or prohibit repo exposure. The Gabelli US Treasury MM fund was another, but changed access requirements post reform, and Wells Fargo's 100% Treasury MM fund is crazy expensive. PIMCO had a unique institutional Treasury Repo only MM fund available for some 401k plans, which would have a nice bump in yield if it still exists.

Edit: spelling
Last edited by Wind_Reaver on Fri Sep 20, 2019 8:13 pm, edited 1 time in total.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by frank5 » Fri Sep 20, 2019 7:00 pm

https://www.investopedia.com/terms/r/re ... eement.asp
"A repurchase agreement (REPO) is a form of short-term borrowing for dealers in government securities."

Federal Reserve injects money to money to support REPO Markets (https://finance.yahoo.com/news/fed-inje ... 14326.html):
$53.2 billion on Tuesday, $75 billion on Wednesday, Thursday, and Friday
75*3 + 53.2 = $278.2 billion in total

Bloomberg responds about supply and demand as the cause:
https://www.bloomberg.com/opinion/artic ... nteresting
"...repo borrowers needed a lot of money because there had been a lot of net Treasury issuance"
"...there happened to be less supply and more demand for money, so the rate was high."

Here is a table of the volume of money in REPO by the SOFR benchmark. Note the variability in the volume of money day by day:
https://apps.newyorkfed.org/markets/Aut ... sults-Page
Date Rate Volume in US$ billions
09/19 1.95 1,137
09/18 2.55 1,196
09/17 5.25 1,177
09/16 2.43 1,156
09/13 2.20 1,134
09/12 2.20 1,156

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by ReformedSpender » Fri Sep 20, 2019 8:54 pm

Overnight funding in effect for repo’s until Oct 10th (at this time)

:shock:
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Re: Spike in Repo Rates

Post by smectym » Fri Sep 20, 2019 10:52 pm

willthrill81 wrote:
Tue Sep 17, 2019 12:18 pm
skepticalobserver wrote:
Tue Sep 17, 2019 12:16 pm
willthrill81 wrote:
Tue Sep 17, 2019 12:12 pm
Do you have a link to data for this?
https://www.bloomberg.com/opinion/artic ... nd=premium
The implications of this move are open to interpretation. For those who see doomsday around the corner, “this time the funding squeeze could have dire consequences for not only the economy but the market.” For those with a bit more tempered attitude, like Thomas Simons at Jefferies LLC, “it’s difficult for the dealer community. But it’s not systemically threatening.”
Image
“Reasons to Sell” is an amusing and instructive chart.

Of course one could just as easily pick out a 10-year Bear period, create a chart ironically titled “Reasons to Buy,” and pinpoint all the false bottoms and head-fakes. So to the extent the “Reasons to Sell” chart encourages investor smugness, I’d be wary what conclusions to draw from it.

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Re: Spike in Repo Rates

Post by willthrill81 » Fri Sep 20, 2019 11:34 pm

smectym wrote:
Fri Sep 20, 2019 10:52 pm
willthrill81 wrote:
Tue Sep 17, 2019 12:18 pm
skepticalobserver wrote:
Tue Sep 17, 2019 12:16 pm
willthrill81 wrote:
Tue Sep 17, 2019 12:12 pm
Do you have a link to data for this?
https://www.bloomberg.com/opinion/artic ... nd=premium
The implications of this move are open to interpretation. For those who see doomsday around the corner, “this time the funding squeeze could have dire consequences for not only the economy but the market.” For those with a bit more tempered attitude, like Thomas Simons at Jefferies LLC, “it’s difficult for the dealer community. But it’s not systemically threatening.”
Image
“Reasons to Sell” is an amusing and instructive chart.

Of course one could just as easily pick out a 10-year Bear period, create a chart ironically titled “Reasons to Buy,” and pinpoint all the false bottoms and head-fakes. So to the extent the “Reasons to Sell” chart encourages investor smugness, I’d be wary what conclusions to draw from it.
The conclusion I take away from both sides of the issue is that there are always reasons to buy and always reasons to sell, and basing one's investment decisions on the basis of so-called 'news' seems more likely to lead to poor decisions than good ones.
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Re: Spike in Repo Rates

Post by TomCat96 » Sat Sep 21, 2019 2:50 am

willthrill81 wrote:
Tue Sep 17, 2019 12:12 pm
I'm not even remotely concerned.

There's no way on earth that I would adjust anything in my portfolio on the basis of this information.

Do you have a link to data for this?
To be fair, although it seems pretty attenuated from the boglehead portfolio, spikes in the repo rates gained infamy as one of the precipitating sparks which ignited the global financial crisis of 2008.

https://www.nber.org/digest/dec09/w15223.html

To put it simply, Lehman had been engaged in the subprime lending market and apparently relied on repo purchases for temporary liquidity to survive. With the deterioration in the subprime lending market, lenders either wouldnt accept securities based on the subprime loans, or the spreads spiked too high for Lehman to accept.

"Based on their analysis, the authors hypothesize that when the subprime real estate market weakened early in 2007, repo market buyers grew anxious about the quality of the securitized assets in the bonds and the increasing haircuts on deals. Although some banks raised capital by issuing new securities in response, those efforts soon fell short because of slumping real estate, and mortgage, prices. This was exacerbated by the forced selling of underlying collateral, which in turn reinforced the cycle of declining asset values and increasing haircuts. By August 2007, market fears reached a critical mass that led to the first run on repo. Lenders were no longer willing to provide short-term financing at historical spreads, and repo haircuts jumped to new highs, tantamount to massive withdrawals from the banking system."

Unable to obtain the liquidity necessary, Lehman collapsed. Bear Stearns, AIG and others followed shortly after.

You might ask what the fall of Lehman has to do with Bear Stearns and AIG.
In a sense, nothing. But the collapse of Lehman triggered the collapse of Bear Stearns and began the financial contagion that would engulf the world.
Contagion, by definition involves financial risk not based on direct exposure.

At any rate, it's anyone's guess if any major bank is so levered that they're relying on repo agreements for liquidity to survive. The most I can say is that history has given the spikes in repo rates a dubious distinction as the match that ignited the financial crisis.

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Re: Spike in Repo Rates [Fed Overnight Repurchase agreement]

Post by Angst » Sat Sep 21, 2019 8:36 am

frank5 wrote:
Fri Sep 20, 2019 7:00 pm

Here is a table of the volume of money in REPO by the SOFR benchmark. Note the variability in the volume of money day by day:
https://apps.newyorkfed.org/markets/Aut ... sults-Page
Date Rate Volume in US$ billions
09/19 1.95 1,137
09/18 2.55 1,196
09/17 5.25 1,177
09/16 2.43 1,156
09/13 2.20 1,134
09/12 2.20 1,156
What do you note about the variability? I'm having trouble making much of it. Stepping back a bit and pulling in more data (see below and scroll down), I don't find a jump in volume that might be expected given the explanations made in this thread for the rate spike. As I questioned in an earlier post above, presumably there is a good explanation for both the rate spike and the lack of a clear aberration (to me at least) in volume Δ, but I haven't heard it. Is it that a 20-something $B daily jump in volume only is significant when it's unexpected? In other words: Normally, does the repo market typically correctly anticipate the next day's volume Δ, but this past week it didn't?

Code: Select all

Date 	%Rate 	$ Vol. 	Δ$ /day
		Billions
09/19 	1.95 	1,137 	-59
09/18 	2.55 	1,196 	+19
09/17 	5.25 	1,177 	+21
09/16 	2.43 	1,156 	+22
09/13 	2.20 	1,134 	-22
09/12 	2.20 	1,156 	-23
09/11 	2.15 	1,179 	- 7
09/10 	2.14 	1,186 	-57
09/09 	2.12 	1,243 	+21
09/06 	2.15 	1,222 	+25
09/05 	2.21 	1,197 	- 5
09/04 	2.21 	1,222 	-59
09/03 	2.17 	1,281 	+87
09/02 	Holiday, no data.
08/30 	2.16 	1,194 	- 2
08/29 	2.12 	1,196 	  0
08/28 	2.12 	1,196 	- 1
08/27 	2.15 	1,197 	+ 7
08/26 	2.10 	1,190 	+60
08/23 	2.10 	1,130 	-30
08/22 	2.09 	1,160 	-28
08/21 	2.10 	1,188 	-40
08/20 	2.13 	1,228 	-13
08/19 	2.11 	1,241 	- 6
08/16 	2.13 	1,247 	+29
08/15 	2.18 	1,218 	
Source: https://apps.newyorkfed.org/markets/autorates/sofr

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Re: Spike in Repo Rates

Post by Valuethinker » Sat Sep 21, 2019 8:49 am

TomCat96 wrote: Do you have a link

You might ask what the fall of Lehman has to do with Bear Stearns and AIG.
In a sense, nothing. But the collapse of Lehman triggered the collapse of Bear Stearns and began the financial contagion that would engulf the world.
Contagion, by definition involves financial risk not based on direct exposure.

At any rate, it's anyone's guess if any major bank is so levered that they're relying on repo agreements for liquidity to survive. The most I can say is that history has given the spikes in repo rates a dubious distinction as the match that ignited the financial crisis.
You have reversed your sequence of events.

Bear Sterns was sold for negligible equity value to JP Morgan in spring of EDIT 2008.

Lehman went down 13 Sept 2008. You might say it was an important day in my life ;-).

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Re: Spike in the Repo rate: what does it mean?

Post by Valuethinker » Sat Sep 21, 2019 9:36 am

Chicken Little wrote:
Fri Sep 20, 2019 2:53 pm
Valuethinker wrote:
Fri Sep 20, 2019 11:35 am
It was a key, unheralded, part of the measures that the Fed undertook in September 2018-March 2019 to keep financial markets from imploding - supplying dollars to European financial institutions.
Can’t seem to even recall this one.

What is the acceptable number of times for the Fed to have to “keep financial markets from imploding.”

Maybe the actionable part is to ask for financial markets that aren’t as prone to implosion?
Typo

2008 to 2009

I really was not aware of it until Adam Tooze's history of the Crash came out.

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Re: Spike in the Repo rate: what does it mean?

Post by Valuethinker » Sat Sep 21, 2019 9:39 am

Chicken Little wrote:
Fri Sep 20, 2019 2:53 pm
Valuethinker wrote:
Fri Sep 20, 2019 11:35 am
It was a key, unheralded, part of the measures that the Fed undertook in September 2018-March 2019 to keep financial markets from imploding - supplying dollars to European financial institutions.
Can’t seem to even recall this one.

What is the acceptable number of times for the Fed to have to “keep financial markets from imploding.”

Maybe the actionable part is to ask for financial markets that aren’t as prone to implosion?
The Fed was after all created after the 1907 Crash which was halted by the force of one individual. JP Morgan. It was felt impossible to just rely on one private banker to again save the system.

You are asking a Policy question and that is beyond the rules of this Forum.

Suffice it to say financial markets have always bubbled and crashed. However the global nature of this crash gives one pause as compared to say the $100bn or so S & L debacle.

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