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Dennis Parker⚡️ - @Xentagz
5 months ago
RT @Bitcoin: "The @federalreserve Desk also will offer daily overnight repo operations for an aggregate amount of at least $75B each, until Thursday, October 10, 2019."
That is about $4,175 per bitcoin. Fortunately, Ctrl-P does not work with #Bitcoin.
https://t.co/c1OrIAc8jc https://t.co/VD0qkBzTem
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Ragnar Lifthrasir ⚑ - @Ragnarly
6 months ago
If you think balancing Lightning Network channels is hard, wait until you hear about central banking. https://t.co/HVWmAW74Qt
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Tim Pastoor - @timpastoor
6 months ago
UPDATE: "The Desk also will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, until Thursday, October 10, 2019."
So ... ~$2 trillion being printed?
src: https://t.co/QFdKeR8nVu
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clapper_never_lied
6 months ago
In ~~Lehman's~~ laymans terms "It looks like someone doesnt trust someone else will give back money for securities, so, we will do that for them."
It probably means there is MAJOR counterparty overnight risk.
This typically can happen if there is a looming financial crisis/bank failure.
https://www.nber.org/digest/dec09/w15223.html
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notnormal3
6 months ago
This is due to lack of feds activity in short term past due to being passive aggressive to trumps criticism. now they gotta suddenly start doing fed protocol again.
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rJRobertFalcon
6 months ago
Overnight/14 days = temporary liquidity, while QE = longer run liquidity e.g 3, 6, 12 months or more (hence permanent liquidity) If the NY fed needs to keep doing temporary operations then it's easier to switch to QE. Bottom line is that there aren't reserves available (or at least willingly available) to cover the liquidity requirements or treasuries (the main collateral) aren't good enough gaurantee atm (more scary than the first) ... is the freeze in credit expected due to QT saturation (match in asset risk vs return)?
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TummyWave
6 months ago
So what i don't get is are they lending 75 billion, getting it back next day, rinse repeat... or are they just injecting money and just getting iou's? Because if its the latter, it sounds like the money is left out there to pump the market in which case bears are 🖕.
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jensenvonjensenn
6 months ago
I am seeing a lot of generalizations being thrown around on a VERY complex topic, so hopefully can at least add to the discussion/overall knowledge here.
I do not believe there is a "liquidity crisis" happening here. The large number of regulations post financial crisis has helped see to that. If you are interested in a deeper dive this has great information on LCR requirements (Liquidity Coverage Ratio) and HQLA/GCLA here. Just do a ctrl + f for those acronyms here
https://www.goldmansachs.com/investor-relations/financials/current/10q/second-quarter-2019-10-q.pdf
Very relevant stuff, but not super easy to digest. It shows that on a ~$930BN balance sheet, Goldman Sachs holds ~$300BN in GCLA (Global Core Liquid Assets) which is basically used as a liquidity buffer and to satisfy regulatory requirements. This is made up of some cash, and primarily treasury's which are repo'd out in what is usually considered to be a very liquid market. Holding almost a third of your balance sheet in liquid cash/securities does not scream liquidity crisis to me.
The question becomes - why is the market for these repo's so one sided (IE institutions hoarding cash instead of lending it in fully secured overnight repo's for treasuries) I don't pretend to know the answer but here are a couple more threads I've found which at least attempt to explain this.
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Johnny55
6 months ago
No liquidity crisis, we just don't know why the banks won't lend to each other. Got it.
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LurkertoThrowaway
6 months ago
Upvote for a detailed and level headed approach. Thanks for your comment and links.
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robyr
6 months ago
Why did the Fed lie about the causes when this started on Tuesday? This smells bad to me. I haven't worked in finance in a while now, but this feels eerily 2007-like. I remember all the excuses for why the "fundamentals are strong" back then, and this feels like a rhyming situation to me. Can anyone explain why Powell would make the comment he made and now, days later, this has ballooned into what appears to be a payday loan situation for banks?
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hey_ross
6 months ago
Companies have plenty of “cash” on the balance sheet. The problem is that it’s all held in Euro’s and other foreign currency to avoid US double taxation and they borrowed insane amounts at low interest in the US to finance operations there. So there is a dollar shortage in US operations and taxes are due. Add the Eurodollar carry trade (borrow Euros to buy dollars to play negative interest rate against nominal dollar rate) and the Chinese looking to move into dollar assets at scale and you end up here.
Which ain’t a great place, but it may be time for the underbrush to burn to save the forest.
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NF-31
6 months ago
Another write-up on this issue:
https://www.forexlive.com/news/!/lets-talk-about-the-repofunding-issue-20190920
(FT has a detailed article on this as well. To get around the paywall, click here (google search) and then click the top returned search result to go through and read the actual article.)
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FuguSandwich
6 months ago
Does the Fed publish details of which institutions are taking part in this operation (I doubt it but am unsure)?
Given: 1) the large amount of excess reserves in the system, 2) the low IOER vs the potential rate to be made on interbank loans, and 3) the relatively small size of this repo facility relative to that market, I wonder if there's a troubled institution or two that other banks don't want to lend to and the Fed is stepping in to support them.
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qznc_bot2
6 months ago
There is a discussion on Hacker News, but feel free to comment here as well.
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Footsteps_10
6 months ago
Excited to read more about this topic I don’t understand and the opinions of people on Reddit that have a vague experience in US domestic monetary policy with interest rates.
OP copied a paragraph with no explanation and said it was spooky. Pack it up boys.
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SpaceGhostBusters
6 months ago
The Desk will offer three 14-day term repo operations for an aggregate amount of at least $30 billion each, as indicated in the schedule below. The Desk also will offer daily overnight repo operations for an aggregate amount of at least $75 billion each, until Thursday, October 10, 2019.
October is extra spooky this year.
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WBigly-Reddit
6 months ago
One item under control is the federal budget which was a two year deal ( this and next) so should add to stability.
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Jetstreamisgone
6 months ago
Is my savings account safe? Or should i pull my cash out before the rush
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rymarc
6 months ago
A lot of people are saying this is the Fed "Bailing Out" banks.
I want to make it clear that these repo operations are not "bail outs" they are short term loans to provide liquidity to money markets. If these repo operations were not conducted, the entire banking system could literally freeze.
The important thing to think about is why the liquidity is running dry and what actions will be carried out to resolve the issue.
Please stop calling this a bail out.
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ukittenme
6 months ago
What else would you call it when you need money for something and someone comes in and gives you the money you need?
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rymarc
6 months ago
So you are aware, repo operations allow market participants to BID on FULLY COLLATERALIZED (usually by mortgage backed securities or treasuries), short term, loans.
To break it down a little more for you, it's as if you got a mortgage, but instead of doing a 5% down-payment, you were required to make a 100% down-payment. And you had to bid for the mortgage against other market participants.
I'm not sure how you are making the jump from what I just described to "someone comes in and gives you the money you need".
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_FreeThinker
6 months ago
Well, but wouldn't it be worrisome if I couldn't find anyone to give me money on market interest rate for my 100% paid house? If someone has to come rescue such situation, it'd indicate there's an underlying issue.
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rymarc
6 months ago
Yes, it is worrisome. That's why I said:
>The important thing to think about is why the liquidity is running dry and what actions will be carried out to resolve the issue.
Having a discussion about WHY there is a liquidity issue seems much more productive than people ranting about this being a bail out for the criminal banks run by lizard people.
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_FreeThinker
6 months ago
I agree.
Do you have any thoughts on that issue; why aren't people willing to lend money at market rate? Do they have not have confidence on the collaterals being offered? Do they not have confidence in the banks to come up with the money tomorrow? Do they think the market-rate is too low and they're making more money somewhere else?
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sanman
6 months ago
not to nitpick, but *prelude* would be the better word here - a prequel comes after like a sequel, even while depicting stuff that happened before
Speaking of sequels, maybe it's time for one - because [It's Not A Job, It's An Adventure](https://www.youtube.com/watch?v=DLGrXGEMOSo)
What's Emilio doing these days?
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Dr_seven
6 months ago
Can you explain why? These short-term liquidity injections have a very small value relative to the entire economy, and are done so that banks remain safely within regulatory compliance with regard to their capital ratios.
The government isn't buying up troubled assets, or issuing loans that wouldn't normally be issued- *those* are bailouts. Call this what you wish, but "bailout" isn't just hyperbolic, it is a total misnomer.
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Johnny55
6 months ago
What they're doing isn't the issue, it's what it indicates. There is a liquidity issue. We don't know the cause, just that the Fed is stepping in. At first it was just going to be a day, then a few days, now at least two weeks. Whatever the problem was isn't going away, and the "taxes were due" line is looking less and less plausible. Bailouts don't come out of nowhere, there are events like this that lead to them. This is an indicator that things are not right.
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sanman
6 months ago
sub-prime wasn't immediately obvious either, which is why it was able to become a colossal problem
so whatever this is, it will be revealed through increasing scrutiny
but what could it be, and what will the fallout be?
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Johnny55
6 months ago
Best theory I've heard is that a bank, possibly Deutsche, got screwed by the oil spike and got cash infusions from other banks to survive. Now those banks are short on cash and the Fed is filling in.
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codefragmentXXX
6 months ago
Deutsche Bank, the bank that may be too big to fail, and too big to bail out.
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PM_ME_UR_LOGIN_INFO_
6 months ago
I will admit that this is an interesting way to treat the liquidity problem but does this properly solve the root issue? What even is the root issue?
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CW0066
6 months ago
They're making some of these "loans" 14 day instead of 1 day loans. So is this like a payday loan situation going on for banks? Not good
The process will involve three 14-day operations involving $30 billion as well as continued overnight operations of at least $75 billion each.
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Dr_seven
6 months ago
I'm curious who is getting those 14 day ones, and why they need them. The overnight ones aren't really an indicator of anything other than misallocation of capital types, but the extended-length loans, even if backed 100% by treasuries, are still concerning.
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lerkmore
6 months ago
Not sure on the who, but [here is a schedule](https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements/repurchase-agreement-operational-details) which shows the 14 day ones.
They did the full 30 billion. They have one scheduled today for $60.
*edit:* They are term which I *think* means they could get repaid sooner than 14 days.
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Dr_seven
6 months ago
Hmm, are you aware of anywhere that the buyers might be listed? The firms taking advantage are doing so for a reason.
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Atlas_84
6 months ago
Just wanted to say I’ve enjoyed watching your back-and-forth on this thread. I can’t say I agree 100% with what’s taking place, but you appear informed and I appreciate the perspective you’re bringing here.
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zebulo
6 months ago
Mark my words: Eventually they’ll add "special factor“ equities to that list of eligibles.
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zebulo
6 months ago
It’s called regulatory capture. See Blackrock‘s latest hires and their CIO‘s public appeal to take equities on board
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Potato_Octopi
6 months ago
Have a link or a quote? I found a presentation from him where he said the ECB could do it (mechanically, to achieve a goal), but wasn't advocating it.
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LifeScientist123
6 months ago
can somebody ELI5 what would happen if the FED didn't do this manouver?
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hngysh
6 months ago
Liquidity crisis. Banks have to maintain overnight liquidity reserves in proportion to their outstanding loans. Without sufficient overnight liquidity they have to pull back in lending, which causes a credit crunch leading to recession.
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MrDubious
6 months ago
The interest rate on overnight loans spikes. This round of repo operations was triggered by the overnight rate spiking all the way up to about 10%. The target rate is 2%. When the rate is high, it slows down lending as banks don't have the ability to pull quick cash to cover their fractional reserve requirements.
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____dolphin
6 months ago
Why does it slow down lending if the interest rate is high? Wouldn't that mean the interest rate just needs to go up more to speed it up?
I don't understand why its so important to prevent the interest rates from rising either.
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MrDubious
6 months ago
Because it's banks lending to banks. The banks borrowing slow down how much they're borrowing when interest rates are high because they can't turn a profit on it.
Banks are required to hold a specific amount of cash in reserve to meet their [fractional reserve requirements](https://www.investopedia.com/terms/f/fractionalreservebanking.asp#mntl-sc-block-inlinevideo__title_1-0). The overnights market lets them cover any shortfall they incur by that day's lending. They pay it back in the morning with new cash they're taking in. With the overnight rates at 2% or less, the banks are willing to lend more daily because they know they can cover any shortfall and still make a profit on the loan.
When the rates spike, they back off on lending, because the money they borrow to cover their shortfall now costs more than what they're making on the money they lent out that day.
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____dolphin
6 months ago
Thank you, excellent explanation. Can't the overnight rate be increased by the Fed if there is so much pressure? Probably this is an obvious question - but what is the worry?
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Dr_seven
6 months ago
Basically the market gets a migraine because massive corporations are acting like Smaug when it comes to their dollars. It isn't the banks fault (for once), but it becomes their problem.
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Uptons_BJs
6 months ago
For 15 days, at $50 billion a day. That's $750 billion!
So there's the old saying that where theres smoke there's fire. Here we haven't seen the fire yet, but we've seen firefighters?
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Dr_seven
6 months ago
Not quite. These are incredibly short term loans, and are repaid in full (backed by 100% collateral) each day, so basically the same $75b is being lended out each day.
It would be similar to having a credit card that you put $500 on and then paid off immediately, and so on and so forth- there would be thousands of dollars in transactions, but no more than $500 in credit used.
This is NOT quantitative easing, and does *not* "print money" in any meaningful sense. It effectively allows banks to borrow in the very, very short term in order to have cash, on the condition that the loan be 100% secured.
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CW0066
6 months ago
No, not each day anymore. Some of them are going to be 14 day loans.
>The process will involve three 14-day operations involving $30 billion as well as continued overnight operations of at least $75 billion each.
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Dr_seven
6 months ago
Those are the ones that trouble me. Long-term loans become *de facto* cash injections at some fuzzy point, and it is very easy for the Fed to jump from just furnishing a bit of quick loans to issuing a load of real cash into the economy.
Which in this case signals to massive corporations that they can keep hoarding cash forever, because the Fed will step in anyway.
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Johnny55
6 months ago
But why do they need to do this all of a sudden? That's the real question that no one has answered.
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Dr_seven
6 months ago
Cash is tight everywhere right now, both because of corporate hoarding and heavy capital investment taking place. The reasons for that are for people much smarter than me to speculate about.
It would exacerbate the problem if overnight lending rates skyrocketed (which they would), so the Fed is stepping in to provide a bit of liquidity for this specific instance. It is a stopgap solution in that it doesn't solve the root problem, but it is a relatively harmless way to hold things up.
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ph1sh55
6 months ago
it's concerning that banks still have ~1.3trillion in excess reserves parked w/ the fed, which is earning now a lower 1.8% interest that they still don't want to draw out and lend overnight for less than 10% to certain parties.
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CW0066
6 months ago
Jesus Christ can they just let me borrow the printing press for 15 minutes?? All I need is 15 minutes.
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rymarc
6 months ago
It looks like this was not just a "temporary" funding shortage, caused by tax payments and UST issuance, as many have claimed. We are seeing a more systemic break down in banking liquidity.
Now the question is, what exactly is causing this and how will it be resolved?
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reddtormtnliv
6 months ago
It possibly could do with the rate differences between Europe and US. Another commenter was talking about how people are converting Euro's to dollars. It could be that dollars are in high demand now compared to other currencies. It could indicate slowing in the economy, but I think it's too early to tell for that.
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MetricT
6 months ago
>Now the question is, what exactly is causing this and how will it be resolved?
An interesting thread in /r/Economics (which I can't find anymore, sadly) gave the "plausible on the surface" explanation that we are essentially "importing" liquidity issues from Europe via Eurodollar accounts.
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MentalRental
6 months ago
That post is a bit wrong. Eurodollar accounts have nothing to do with the Euro, Europe, and EUR/USD carry trades (or Yen carry). Plus carry trades have been around for ages.
However, there is the Eurodollar futures trade which, apparently, is even more popular than E-Minis. Furthermore, the settlement date for September 2019 Eurodollar futures was the 16th. What's more, I believe the open interest on that was something to the tune of a trillion dollars.
I'm still researching all this. This may or may not play a part in the repo crunch. If it does, the October 2019 settlement date is Monday, October 14th. If the repo rate spikes again then we'll know that Eurodollar futures settlement is a likely cause.
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rymarc
6 months ago
I read the same explanation by /u/Laminar_flo. He provided some very good information and perspective but was clear to state that everything he wrote was "table talk" from traders on swap desks.
I do believe that the eurdollar swaps are playing a role in this liquidity shortage, but it seems unlikely that a liquidity shortage on the scale being discussed (~160 billion) is coming from just swap trades. My own belief is that China's fx position has also recently become a major contributor to the problem.
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baibubbles
6 months ago
How can I get a sense of the scale of things like this? Not robin hood I’m sure
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Laminar_flo
6 months ago
Thanks for the shout out. But consider this: incremental and aggressive European buying was enough to flatten the UST yield curve in May/June - that takes a ton of money. My point is that these two things are linked - Europeans buying USTs flipped the curve and then the continued financing of that trade, particularly in the face of two Fed cuts, is contributing to cash being in short supply.
And to be clear, the tax payments, the auctions plus several other things (end of qtr originations, etc etc) are all contributing to the cash crunch. But the pint of my post is that all these events have happened in the past too with no real impact.
Ppl are looking for the hidden factor that causing the ‘excess’ strain, and my guys think it’s the eurocarry. In a normal world Eurodollar accounts are around $150B overnight. It’s big $$ as is - now imagine if Eurodollar demand were to increase by 10% to 20% in ~6mo and suddenly you have big problems in ON funding when combined with routine, but normal, funding activities. (Edit - nobody really knows Eurodollar volumes in real time. The Fed tracks this well after the fact, so unfortunately we won’t know if this is quantifiably true until prob next year)
I’m not saying it’s ONLY eurocarry. I’m saying it’s a variety of reasons, but a big one ppl are missing is eurocarry.
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furthermost
6 months ago
> these events have happened in the past too with no real impact
But US yields have been way higher than EU yields for years, why would it manifest as an issue right now?
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circuitloss
6 months ago
Are you talking[ about this comment](https://old.reddit.com/r/Economics/comments/d6e8qv/the_fed_pumps_another_75_billion_into_markets_its/f0sdhgg/) from yesterday?
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FloatyFish
6 months ago
This seems like it’s doing double duty of not only performing a bailout, but also normalizing the act of bailing out the market. I guess the people who said that bailouts would continue were right.
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Dr_seven
6 months ago
Not quite. These are incredibly short term loans, and are repaid in full (backed by 100% collateral) each day, so basically the same $75b is being lended out each day.
It would be similar to having a credit card that you put $500 on and then paid off immediately, and so on and so forth- there would be thousands of dollars in transactions, but no more than $500 in credit used.
This is NOT quantitative easing, and does not "print money" in any meaningful sense. It effectively allows banks to borrow in the very, very short term in order to have cash, on the condition that the loan be 100% secured.
This could maaaaybe be considered a bailout in the sense that the Fed is lending (heh) a hand when it comes to liquidity, but no significant support of the actual institutions is occurring.
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____dolphin
6 months ago
They are doing it doing it every day up to Oct 10th. It's as if they did QE until Oct 10th... and if they decide to just indefinitely expand the timeline, it just becomes regular QE no?
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FloatyFish
6 months ago
Thanks for the explanation. What would happen if the Fed hasn’t lent the $75 billion, would the market have locked up and potentially led to failures, or would somebody else have stepped in to provide the money?
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Dr_seven
6 months ago
Neither, thankfully. The money is there, we have more money in circulation now than ever before.
However, corporations are hesitant to deploy their cash or lend it out for a multitude of reasons. This puts banks in the position where, for no reason other than illogical corporate hoarding, they would have to pay very high rates on the overnight lending (after all, the money is there, the issue is that people want a bigger incentive to lend it out, for no real reason).
This reduced liquidity wouldn't cause institutions to fail, but it would make routine operations more costly and inefficient, for no real reason.
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FloatyFish
6 months ago
So the only downside is that people would have to pay higher rates? Isn’t that a sign that the market is working (less people lending = the ones who lend can charge higher interest rates)? If that’s the case, it seems to me that this intervention is unnecessary.
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hngysh
6 months ago
Instability is bad for financial markets. When markets are uncertain, banks stop lending and the economy collapses.
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circlesinsidesquares
6 months ago
Well, the federal reserve system is what imposes reserve requirements in the first place, so it's up to them to decide how to manage that. This is like saying, when a theater oversells tickets, it's people's fault for not coming early to get a seat, and they should have to fend for themselves. If you think the federal reserve system is stupid or inefficient that is fine. But if you say they should just stand back while the system they created runs around like a headless chicken, I think that's a poor assessment of their responsibility here. Certainly they can be overly accommodating to poorly run financial institutions, or create poor incentives, but when you're the referee, you got to do something about the brawl on the playing field. Either way sounds like a mess, and it's not clear to me what is happening.
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Philosophile
6 months ago
Creative destruction is necessary. Protecting inefficient and unprofitable businesses is anti-capitalist (theoretical capitalism), and has long-term depressing effects. Totally agree with you. Let's see some competition, not just prioritizing executive bonuses and dividends to shareholders. This short term thinking is going to fuck us, just like every other time in history.
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Dr_seven
6 months ago
How is my statement an apology? Is there some grievous error being made here? Ostensibly the role of the Fed is to modulate the economy to keep inflation low (and by extension keep the economy at large as stable as possible).
This repo sequence is a very simple way to address the problem of overnight liquidity being unstable/expensive, and it doesn't add any new money into the system like QE would.
What would you have them do instead?
Edit: responding now to your ninja edit.
I think that you may be reading into this a bit much. On paper, you aren't necessarily wrong in that it is interference with the market to assist banks, BUT the effects of this are mostly good for everyone.
A credit crunch involving institutions that are otherwise well capitalized and not over-leveraged is a pointless exercise that makes everyone's lives harder, and the Fed putting their thumb on the scale to prevent that isn't exactly a world-shattering idea.
The root cause of a lot of the dry credit is *corporations*, not banks. Corporations are sitting on trillions in cash and cash equivalents, artificially decreasing the velocity of money. *That* is the reason why the Fed even needs to do this in the first place.
What would be gained by the Fed just allowing overnight rates to skyrocket? Major corporations are the ones hoarding the cash.
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reddtormtnliv
6 months ago
If there is excess cash as you say, where is it though? Wouldn't it be in the banks?
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CW0066
6 months ago
They are now going to offer 2 week loans to some of these banks. It's a slow boil
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FuguSandwich
6 months ago
Yeah, the $30B in 14 day term repos aren't getting nearly the attention they deserve. Though, according to the press release there aren't supposed to be any more after today.
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Dr_seven
6 months ago
If it is considered a regular loan in your book, it is a very miniscule one at $75b, since that is the full exposure.
Whether or not this is the right move is a matter of opinion, but it is a fact that, (at least for now), this isn't some trillion-dollar buying spree. It is troubling that this is even happening at all, but on its' own, this isn't really that big of an impact.
I don't disagree with you on principle, this is definitely a market distortion. But it is nothing like quantitative easing, they aren't even in the same dimension when it comes to the magnitude of money being dumped.
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Dr_seven
6 months ago
I'm sorry, but no. This is not caused by individual deposits from citizens not being made because the banks are paying crappy rates. I sure don't have a few billion under my mattress that I am hanging on to in illiquid form.
But, you know who does? Apple, for one, and tons of other companies hanging on to billions held offshore or in other ways that remove money from circulation. If banks started paying more interest, more people might save, sure, but the impact would be negligible.
The banks (for once) haven't caused this issue, and neither have private citizens. We aren't the ones hoarding cash for no reason at all.
Overnight rates spiking because of low liquidity isn't gonna be solved by banks increasing the interest on our savings accounts. That would imply that we citizens *have* that kind of money to save...which we don't.
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____dolphin
6 months ago
>The banks (for once) haven't caused this issue, and neither have private citizens. We aren't the ones hoarding cash for no reason at all.
Why would Apple be holding onto money for no reason at all? Is there no way to organically lure it out?
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Dr_seven
6 months ago
A few billion...? That doesn't apply here, at all, because individual deposits wouldn't solve this problem, even tens of billions worth.
You do know that deposits aren't Tier 1 capital, right? Liquidity for regulatory compliance reasons has to come from capital that can't be redeemed at will.
Ergo, even if we all went to the bank and dropped a bunch in our savings, it still wouldn't help the banks have the necessary Tier 1 to remain compliant. It might even make it worse, as to honor those new higher savings account rates, banks would have to either issue bonds and loans, or dip into their retained earnings, or perhaps issue stock. These things would *further deplete* their core capital.
This isn't a simple issue, and any headline pretending it is, is lying to the public. It isn't some black and white issue, at all, because it stems from very complex regulatory requirements that are important to comply with. Better the Fed ensure that banks aren't compromising their capital ratios, because shitty capital ratios is what made 2008 such a disaster.
This particular issue of core capital adequacy is the whole reason we even had Basel III.
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FuguSandwich
6 months ago
>This is NOT quantitative easing
It's not, but it's laying the foundation for it. Goldman Sachs is now saying they expect POMOs to restart in mid November.
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reddtormtnliv
6 months ago
QE is using printed money to take less profitable assets off the hands of other banks to free up liquidity. The difference as I understand between QE and repo, is that that the money isn't printed (although could be) in repo, and the benefit in repo comes with a fee (or penalty) attached. So it isn't a handout in the same way. Also, with repo, the assets aren't necessarily low profit, but again they could be.
Another difference as I understand is that QE is used when there may not be a requirement for bank reserves, where as repo is more to meet reserve requirements.
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FuguSandwich
6 months ago
The difference is in the duration and intent. "Replacing assets with dollars" is (oversimplifying) how the Fed conducts ordinary open market operations for monetary policy. However, since the intent is to decrease the interest rate it's only considered easing not "quantitative" easing. Likewise, in the case of the repo facility, these are overnight operations to increase liquidity (not to implement monetary policy). Quantitative easing is when the Fed buys assets and holds them on its balance sheet long term, not just to provide temporary liquidity or to drive interest rates down. It's typically done when interest rates are already at or near zero and more monetary easing is required.
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FuguSandwich
6 months ago
Indefinitely, until there is a change in policy. The Fed still has trillions of dollars in bonds on its balance sheet from 2009, for example.
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____dolphin
6 months ago
There's still a chance that when Oct 10th comes around, they'll just make this indefinite
1
LurkertoThrowaway
6 months ago
Cross posting from the econ sub:This is huge as it paves the way for a more permanent solution. Swaps spreads are bid here and we are starting to see funding costs come lower. 2y swap spreads went from negative 4 to postive 1.5 after the announcement. Clearly when funding gets tight the fed will bail you out. Interesting that we see such a stark turn around since Powell was so tightly lipped. Makes me think these 2 week operations will continue to be a thing to alleviate pressures. We might see a permanent repo facility which would be a game changer!
2
QuinZ33
Other 6 months ago
> We might see a permanent repo facility which would be a game changer!
I said yesterday that this is the new normal. People disagreed.
2
crazjayz
6 months ago
I don't believe it should be the new normal when the Fed is a lender of last resort. People are saying that cash is tight because banks just paid taxes and whatnot, thus don't have enough cash on hand to close without borrowing. But it strange that this is the first time it's happened in close to 10 years; also the dollar amounts are HUGE.
If they are getting paid back in less than 24 hours, then I can't call this a QE (since it's monetary procedures as opposed to policy), but these recent repo amounts are massive. To put it into persepective, QE1 the Fed was buying $30B/month, and by QE3 they were doing 40-85B/month; we just did \~$200B in a week? That's kind of nuts. Again, assuming the Fed gets paid back, it's not a big deal, but I still wonder why are the banks leaning on the Fed so much these past few days.
> In an announcement Friday, the New York Fed said it will continue repo operations through Oct. 10. The process will involve three 14-day operations involving $30 billion as well as continued overnight operations of at least $75 billion each.
[Souce](https://www.cnbc.com/2019/09/20/fed-repo-new-york-fed-to-conduct-operations-until-mid-october.html)
Finally, the Fed's books are getting a biiiiit heavy. 1 Trillion before the '08 crash, 2 trillion by '09, 3 trillion by the end of '12 and 4 trillion by '15. They were supposed to taper off and sell these assets over time (which they have been), so until I see this start moving back up, I'm inclined to agree that this is normal fed activity, and not fed policy (read: QE), despite the rarity of these events over the past 10 years.
4
LurkertoThrowaway
6 months ago
This is huge as it paves the way for a more permanent solution. Swaps spreads are bid here and we are starting to see funding costs come lower. 2y swap spreads went from negative 4 to postive 1.5 after the announcement. Clearly when funding gets tight the fed will bail you out. Interesting that we see such a stark turn around since Powell was so tightly lipped. Makes me think these 2 week operations will continue to be a thing to alleviate pressures. We might see a permanent repo facility which would be a game changer!
43
sanman
6 months ago
What are the implications of a permanent repo facility? Is this a sign of a crack in a dike? Or alternatively, is there any way this could become a loophole for something negative?
13
reddtormtnliv
6 months ago
It isn't necessarily a crack, but would allow banks more of a cushion when operating. If these problems are caused by a contracting economy (which seems to have mixed signals), then it would be a crack. Some feel if you create too much of a cushion for banks to operate (like this or QE), then it can encourage risky investing, which is more likely to crash the economy. I think the jury is still out on that aspect though.
2
sanman
6 months ago
But it sounds like there is a contracting economy here - the contracting European economy - so maybe the crack is growing on the other side of the dike wall?
If Repo is being driven by European demand for UST, then it's a sign that European capital markets are unprecedentedly desperate to lean on US for carry trade. But is there anyone else besides the US whom European capital markets could lean on and do a carry trade with?
1
reddtormtnliv
6 months ago
Not that I'm aware of. Possibly emerging markets, but my understanding is those are already more risky.
1
fremeer
6 months ago
With the increase in covenant lite loans and CLO trading isnt there already evidence that risky evidence on the rise?
What happens if say the fed ends up being the go to place for repos. Does the USA get stuck with the bill if everything goes belly up.
2
LurkertoThrowaway
6 months ago
Ok so let's take a step back. Why is a repo facility an amazing thing for banks? It basically makes their HQLA that's in the form of USTs cash equivalent so it's essentially making treasuries and cash the same vehicle. Banks have to hold a certain point of instruments to cover their deposits. If the Fed were to introduce a standing repo facility it would do a couple things. #1 it creates an imaginary ceiling for repo markets. It becomes a ceiling for repo because no matter how strapped the market is for cash banks can always borrow by pledging their collateral at the Fed and getting t+0 cash. The trick for the Fed isn't the existence of the facility it is how high they plan on setting the rate for the facility. Set it too low and the Fed becomes the repo market. Basically everyone gets cheap cash from them. Set it too high and it becomes useless like the discount window and it doesn't do anything to relieve stress in repo markets. #2 it gives confidence to dealers that the Fed will help make sure that transactions are smooth and consistent. This whole ordeal of the NY Fed not deciding whether to intervene the day before was actually crazy. Basically markets had no clue if collateral was going to go ballistic and you had synthetic instruments trading cheap to UST. That can be seen by swap spreads trading negative and elevated implied repo rates in UST treasuries basis(gross basis went really negative). Perhaps it is only open on quarter end or payment dates.
TLDR the facility supports dealers. It's probably earlier a postive or nothing depending on how and where they set it. But once they do it they have to keep it. The St Louis fed wrote about it earlier this year I believe.
7
LurkertoThrowaway
6 months ago
Not what I said. But it does help that when they need capital if they have collateral on hand they can get it quickly.
2
clafort
6 months ago
Could you please explain the connection to swap spreads? Why does higher funding costs lead to negative swap spreads? Are you saying that the demand for HQLA is bidding up the UST?
2
LurkertoThrowaway
6 months ago
Two separate things. Higher funding costs drive swap spreads negative because no one actually uses real money to UST if they aren't RM clients. A RM client would be a pension fund, corporate or sovereign wealth find. These are people that have real cash. (real money=RM). So the formula for a swap spreads is (swap spread= yield of swap -yield of treasury ). It s just market convention but it used to make sense because before 2008 most swaps were bilateral or not cleared through a central clearing House like today, so the swap actually had counter party risk and if you did a swap with a bank you would be compensated with a slightly higher yield because the bank is marginally more like to default than the US government. So im previous lives, funding shorts where you thought the bank wouldn't be good for it's money, swaps spreads would widen and go more postive. Intuitively that makes sense, the risk of doing a swap with a banking is much higher when funding is tight and the world is blowing up. But that's not the case today. Because all swaps are cleared the driver of most spreads can be correlated to funding pressures.
Going back to what I spoke about in the beginning, hedge funds that buy USTs don't just have 100mm dollars to buy 100mm dollars worth of USTs when they buy them. So what they will do is on T+0 buy a UST(treasuries settle t+1) from a trading desk, take that treasury and pledge it to a repo desk, that repo desk will loan the hedge fund cash to buy the treasury (passing to the hedge fund any coupons / mark to market), and the hedge fund will pay the repo desk the funding costs usually on an overnight basis for that cash. In a world were funding is cheap, it's easy to repo on your bonds at a reasonable price. I.e. call it 2%. So people are willing to buy treasuries. But when funding gets expensive, like 10%, you don't want to buy treasuries because it's expensive on an annualized basis so the yield of USTs drifts higher(remember the formula swaps spreads = swap yield - UST yield) pushing swap spreads more negative.
The other thing during funding times of stress is that net for net to gain the exact same duration exposure, you can replicate it in swaps without needing any cash. So you can get a 100mm notional swap without any cash exchanged up front whereas you need to pay 100mm USD to buy 100mm bonds.
The HQLA comment simply meant that USTs become more valuable to banks because at a repo facility when they are strapped for cash, they can instantly swap it for cash by paying the repo rate.
The NY Fed, the ones doing the repo operation wrote a great paper on it. https://www.newyorkfed.org/research/epr/2018/epr_2018_negative-swap-spreads_boyarchenko.html#targetText=Negative%20Swap%20Spreads%20%2D%20FEDERAL%20RESERVE%20BANK%20of%20NEW%20YORK&targetText=Market%20participants%20have%20been%20surprised,becoming%20negative%20for%20many%20maturities.
4
Looking-for-advice30
6 months ago
All because of this low, almost negative territory interest rates.
1
LocalTrust -
@LocalTrust
6 months ago
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.
CyanLite4 -
@CyanLite4
6 months ago
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.”
SilasX -
@SilasX
6 months ago
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))
helen___keller -
@helen___keller
6 months ago
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?
ipython -
@ipython
6 months ago
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?
motohagiography -
@motohagiography
6 months ago
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.
beezle -
@beezle
6 months ago
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...
Rury -
@Rury
6 months ago
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?
aazaa -
@aazaa
6 months ago
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.
csense -
@csense
6 months ago
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?
h2odragon -
@h2odragon
6 months ago
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?
Bostonian -
@Bostonian
6 months ago
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.
situational87 -
@situational87
6 months ago
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.
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