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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.
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)?
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 🖕.
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.
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?
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.)
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.
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.
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.
Is my savings account safe? Or should i pull my cash out before the rush
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.
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?
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.
Mark my words: Eventually they’ll add "special factor“ equities to that list of eligibles.
can somebody ELI5 what would happen if the FED didn't do this manouver?
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?
Jesus Christ can they just let me borrow the printing press for 15 minutes?? All I need is 15 minutes.
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?
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.
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!
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!
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.”
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))
Adding it together we can see the fed is going to be providing a minimum of $165B in total liquidity to the market while all the operations are undergoing.
Curious how this will play out in the long term. Are we going to add even more liquidity when these operations end?
Does this move mean that the fed is trying to keep its benchmark rate too low and absent market forces it would be much higher?
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.
https://www.bloomberg.com/quicktake/the-repo-market
https://www.bloomberg.com/news/articles/2019-09-18/powell-se...
https://www.bloomberg.com/news/articles/2019-09-18/overnight...
https://www.bloomberg.com/news/articles/2019-09-16/repo-mark...
Is it possible, or are we close to to where the banks (or other buyers) won't be able absorb the glut in treasuries themselves, and the fed has to buy them, effectively monetizing our deficits?
1. A repo intervention on this scale hasn't happened since the 2008 crisis.
2. Experts seem divided on what's causing the extremely tight overnight liquidity phenomenon.
3. The Fed refused to budge from its tepid stance on long-term rates and restarting QE in its recent meeting. This stands against a backdrop of a stagnating world economy, the collapse of foreign sovereign bond yields, and unprecedented browbeating from the White House.
Hasn't the Fed for years now been literally paying the banks to do just that with IOER?
My god. They just sit down at the keyboard and print money out of thin air and electrons and give it to any of the 20 biggest banks who ask for it.
We could literally solve every single problem.
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