Wall Street Is Buzzing About Repo Rates. Here’s Why.

Signs of stress have emerged in a key market that the financial system relies on every day.

Comments: 55

  1. This time is different. No, really. Well, it is true that, despite the saying, history does not repeat itself exactly as before. But every storm breaks a bit differently with similarities that, when we don't learn from past events, surprise and overwhelm us. In both the financial markets and in places like the Middle East, there are portents of potential "coming events" that, while not inevitable, are daily exacerbated by willful ignorance, malfeasance and misfeasance. If only those who elected the trouble would be the ones to suffer most. Since the game is rigged, that's not what happens.

  2. I agree that this little "liquidity episode" in the Repo market is not indicative of an impending crisis. However, I would suggest that it might be an indicator that the current Fed isn't very good. As was noted in the article, the issues of tax bills and treasury settlements etc...these items are not unknown they were just over looked. Not exactly confidence inspiring.

  3. @John Trump doesn't hire people need on their attention to detail.

  4. The frightening issue here is not the specific increase in overnight rates. Rather, what is scary is the fact that in such a lumbering and complex economy as our own, nobody and no institution appears able to fully understand all the systems that affect that economy. “The problem is, we don’t know what that minimum level is and we just smacked right into it,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities USA. What else in this economy is unknown or unknowable and when will our ignorance lead us right off a cliff? It happened in 2007 and it can happen again.

  5. What this really means is there was a temporary shortage of cash in the market since the US Government is selling so much debt. Sooner or later, there will be no one left to buy it.

  6. That’s unlikely when Europe and Japan are selling bonds with negative yields. U.S treasuries are still in high demand. The rate shot up because there was not enough money to meet bank demands for cash (including demand for debt).

  7. The extreme rate increase is rather troubling. If it had crept up to the 6-10% (5 times increase from 2%) then it could make sense, but really it is troubling at how fast and how much it increased.

  8. @RAH Despite the (usually empty or obfuscatory) rhetoric from the powers that be, I can't not notice that that the Fed reduced rates by 0.25%, the Fed injected well over $100B into the system and the ECB also reduced rates, all within a few days. Probably just a coincidence.

  9. "Repos are short-term loans mainly used by banks and hedge funds in their daily bond trading and brokerage businesses. These firms typically pay for their investments with borrowed money, and the repo market provides those large sums of money on a daily basis." Hedge funds, eh? Does that mean the Fed is sustaining the gutting of companies and their pension funds? And can the "investments" of the Fed's customers largely be defined as buying back their own stock?

  10. Is this time different? Really. An increase in a market of this size and liquidity is unlikely to be some technical glitch, like me having to reboot my computer. There's a lot of sophisticated traders in this market with access to reams of data about the securities involved. Something is amiss, and we haven't yet seen the root cause. In 2007, the market seized up as banks realized that mortgage-backed securities were turning toxic. Lately, we've been reading that corporate loans have been booming and their risk profile has been rising. Is this the root cause?

  11. @Ken L “Is this time different? Really.” My thoughts exactly.

  12. The end will come. The only question is when and how bad. Corporate, national, consumer, student debt is at or near all times highs. There is no such thing as a free lunch or lunch on credit.

  13. @Paul. The entire economy is predicated upon credit, which spawned an industry called insurance. It might be time for thinking about starting a vegetable garden. :)

  14. @Paul plus International

  15. @Peter Close and Rick...thank you for your replies. Agreed.

  16. So what happened is the money markets got comfortable with the almost $4 trillion of quantitative easing the Fed injected in response to the 2009 meltdown. Now that the Fed is cashing out a little bit of that, this short-term market "smacked right into" the minimum liquidity level. What kind of snowflake is this global financial system, anyway? In the old days, bank buildings purposely displayed an outrageously heavy style of architecture. This to convince people their money was safe, as if oversize walls and doors equaled protection. Nowadays it's obvious that at some level, it's all a casino, with thousands of high-dollar side bets going on every second, and the government (that is, us) on the hook if anything in this complex choreography goes bust.

  17. @Greg Shimkaveg The Fed actually created about $19 trillion (according to the first ever audit of the Fed, forced by legislation created by Bernie Sanders). This resulted in a NET of $3 trillion in free money for global banks. Since it came from the Treasury, that was our money, not theirs, about $9,000 per citizen, or $36,000 for a family of four. What would the recovery had looked like, if each of us had gotten $9,000 to pay mortgages, education, credit cards, and other debt, invested in small business and farms, or just went shopping? Those that paid their debts would have bailed t the banks indirectly and saved their homes, or just increased their buying power. Instead the global banks sat on the cash, openly saying they wouldn't invest in a weak economy, when the whole excuse for giving them that money was to invest in a weak economy. The current global finance system is a complete scam, on top of a global trading system that is a complete scam. (Trump is smart enough to know what the underlying problems are, and smart enough to manipulate the underlying problems for cash and power. He's not thinking about solving anything, because Smash and Grab relies on chaos.) The Fed needs to decide how much it wants to grow the economy and divide that money equally among all citizens. That would give them more direct control puffer the money supply, instead of giving it to global banks to "influence,"what they do, which is not aligned to the interests of We the People.

  18. @Greg Shimkaveg The Fed actually created about $19 trillion (according to the first ever audit of the Fed, forced by legislation created by Bernie Sanders). This resulted in a NET of $3 trillion in free money for global banks. Since it came from the Treasury, that was our money, not theirs, about $9,000 per citizen, or $36,000 for a family of four. What would the recovery had looked like, if each of us had gotten $9,000 to pay mortgages, education, credit cards, and other debt, invested in small business and farms, or just went shopping? Those that paid their debts would have bailed the banks indirectly and saved their homes, or just increased their buying power. Instead the global banks sat on the cash, openly saying they wouldn't invest in a weak economy, when the whole excuse for giving them that money was to invest in a weak economy. The current global finance system is a complete scam, on top of a global trading system that is a complete scam. (Trump is smart enough to know what the underlying problems are, and smart enough to manipulate the underlying problems for cash and power. He's not thinking about solving anything, because Smash and Grab relies on chaos.) The Fed should decide how much it wants to grow the economy by and divide that money equally among all citizens. That would give them more direct control over the money supply, instead of giving it to global banks to "influence,"what they do, which is not aligned to the interests of We the People.

  19. I hope the author isn't arguing that the Fed needs a balance sheet with more than $3.8 Trillion in bond holdings in order to have adequate liquidity in the market.

  20. I'm afraid the writer "thou protest too much" that this is not like 2007, but the piece is pretty vague on what's not like 2007. This time it's bad/unsustainable debt in commercial/retail property instead of homes, but yea, this market event is pretty much a VERY strong indicator that it's happening again. As for what they learned last time this happened? Apparently, it's not how to avoid the meltdown, it how to hide it for as long as they can, in part with writing like this.

  21. @Bob Butler Actually, it happened in 2008 and anyone that couldn't see that coming wasn't paying any attention. At all.

  22. So we are largely in FDIC and money market retirement funds (60%). There is a lot of cash sloshing around to goose the economy, in defiance of historical precedents. Does anyone have any advice?

  23. Just at thought, but could this be a direct result of rate inversion, as borrowers eschew more expensive short term loans for even shorter overnight loans?

  24. Meltdown on the way. Governments cannot print money forever and never have any consequences. ThIs repo rate business did not happen from one day to the next. It has been building.

  25. Did the Saudis and the Chinese reduce their participation as lenders in these markets? The Saudis because of worry over what happens next in their conflict with Iran? China because of their need to purchase food (especially pork) on the world market to stabilize prices? Hoarding cash is a defensive move if you think you see storm clouds on the horizon.

  26. As the article notes, from the beginning of the crisis until 2014, the Fed supported the markets with a steady pump of cash, including the purchasing of large amounts of bad mortgage debt from the banks. In the process, the Fed grew its balance sheet by more than $3 trillion. Some suggested that because of these bad "assets", the Fed should be considered insolvent. A goal was to get the banks lending again, but there naturally were concerns that all this money added to the markets would cause inflation. This didn't happen, in part because for years the banks didn't lend the money out, but just took the money for what it was - a bailout. A significant amount of this money is probably off in the Caymans and Switzerland now, after having been paid as huge bonuses. This is in part why the recovery was so slow. Then in 2018 the Fed decided it would try to start clearing its balance sheet with hefty monthly asset sales. We saw how that worked out - last fall, the markets got wind that the party might be ending and dropped sharply, whereupon the Fed apparently switched to a more gradual pace, ~30 billion/month overall average since 2018. This week we apparently discovered that even this pace is too fast, as liquidity dried up. As the author says, there is no reason to think that this is a leading indicator of another financial crisis - no, it is just another trailing indicator that we're still in the middle of the first one.

  27. What a surprise. More stresses and strains in an economic system modified and manipulated by the financial giants to direct the majority of the money supply toward themselves and away from the productive economy. No doubt there will be accolades all around when a fix is found for these glitches, and a fully exploitative system can run smoothly. Until an alternate system is installed, we will continue fighting over crumbs while leadership collaborates with the financial institutions in maintaining economic/social/political power. An amazing and detailed alternative economic solution has presented by Ellen Brown in her new book "Banking On The People". Incredibly, most of the changes proposed can be achieved with existing infrastructure. I fear it will take a financial catastrophe worse than what occurred in 2008 to inflame the public will to demand a true overhaul of our corrupt systems of finance.

  28. @jyalan Most Americans have no idea how the financial system works. America needs a lot more education but, as we heard from our top leader, politicians love the uneducated.

  29. ..."And on Thursday, for the third time this week, the Fed pumped billions into the financial markets to push rates lower." Doesn't seem like the Fed should be 'pumping billions' into financial markets; isn't that the same as a government subsidized stock market. Thought we had a free market. Government should not be involved with this outside an economic collapse.

  30. @Ma The Fed is not pumping money into the stock market. They are in effect putting money into the fed funds market. They do this by purchasing gov't bonds which of course increases the amount of cash in our commercial banks who lent money to us by buying gov't debt (bonds). Now we are buying/paying off these loans/bonds. The banks and financial institutions around the world who need U.S. dollars, sell their gov't bonds (loans they made to our federal gov't) for cash. In other words the federal gov't bought U.S. Bonds on the bond market just like insurance companies, state and city retirement funds and other public and private institutions around the world do through our Wall Street firms. If gov'ts around the world, including ours, decided to stop buying or selling bonds most financial institutions around the world would collapse. Read about macroeconomics at your local library or take a few economic classes at your local university. It really is interesting. Money is like blood. When it stops circulating businesses die.

  31. In the wee hours the other night, I watched Bloomberg. Some European analysts opined in detail about the repo market trouble. They said the situation was not like 2008- 2009, but were not certain that trouble did not await us. Hear that rumbling in the repo market? It's the birds of plumage coming home to roost on Donald J. Trump's hair. Buckle your seat belts.

  32. The explanations are non-sensical. The repo market is a multi-TRILLION dollar market. Along with US Treasuries and US mortgages, it is among the largest and most liquid markets in the world. It's hard to believe tax payments and a Japanese holiday are the cause. Don't companies / individuals pay taxes every quarter / year? Don't the Japanese have holidays every year? It sounds like there's a serious liquidity / funding issue with one or more very large entities. Any knowledgable insight would be most welcome.

  33. Our Prime Minister is meeting your President next week. Maybe your government could get a few tips from our PM on how to set up a Universal Superannuation scheme. Seems to me that government can run a pension scheme better than private enterprise. https://www.nzsuperfund.nz/

  34. A hiccup, you say? If you don't know why it happened, find someone who does, isn't that what reporters do. The title implies you are going to tell us why. You didn't.

  35. This is such good news!.........except it's NOT. When there is not enough $$$ to buy debt (which there is plenty) the interest rates go up,up, UP to attract buyers......except the buyers have no cash. Very nice!

  36. There has been much reportage lately concerning the condition of our economy. It's all to complicated for mere mortals to understand. I hope we don't get caught with our pants down again.

  37. Oh you mean the pay day loan market for people who have money. The only twist is they always use this money, which of course includes the cost of borrowing it, to make more money, not pay off the corner oxie dealer.

  38. Might be time to follow Bernard Baruch's advice on how to (get and) stay rich -- get out early. Sell now!

  39. The Trump depression is coming?

  40. This may be a little off topic but.... I'm someone who has been so taken aback with Trump er leadership? that I've moved most of my money out of stocks and into savings. I can't get away from Trump, he keeps calling for lower and lower interest. Give a fellow a break already. Oh and I'll give him credit for the stock market, I keep in mind that the table was set by the prior President. What do you call someone who takes credit for everything good and points the finger at anyone else? And you know he doesn't know a darn thing.

  41. I'm going to invest everything I have and all I can borrow in border wall construction material and equipment. I want to sleep at night.

  42. To borrow from Casey Stengel, Does anyone here know how to play this game?

  43. “This time is different. No, really.” This statement is one reason Economics is called the dismal science. Recent studies have confirmed only the “dismal”, “science” has been shown to be false.

  44. The expectation that the Fed should be more protective of big banks and hedge funds may be indicative of the ever increasing power of those two entities to wring money from the system with their backs always covered when they screw up. The same info available to the Fed was available to banks and hedge funds and should have been taken into account in their most recent activities.

  45. Hot, hotter, hottest ... Yeow!

  46. Our ignorance is truly compounded.

  47. Hmm while it may not mean another Great Recession, there is something going on. The government does too much to encourage speculative investment in the housing markets Like to $250 k capital gain exclusion rule

  48. If only the USA government had a universal government pension fund for everyone, including billionaires, then USA citizens would not have to worry about their retirement. Meanwhile back in NZ, I just heard on radio news that our governments Universal Super Fund has out performed its markets offering a return of 7%.

  49. The day after the Beast was elected, I liquidated all of my securities, and put all of my investments in treasuries or FDIC-insured cash equivalent funds. Now, you could say that I've missed the boat on the growth in the value of securities in the interim, but as someone in his sixties, I've been able to sleep at night knowing that when the crash comes, and it will, I am protected.

  50. @Didier Good for you that you can sleep at night. Prudent retired investors know that the market always recovers and they only keep about 5 years of expenses in low volatility investments. Many members of the Association of Individual Investors keep upwards of 50% of their portfolios in equities, adjusting the mix annually, knowing that any losses are only on paper and the market will re-bound. You remind me of a boss I once had. A the start of the Great Recession, and subsequent market fall, he asked if he should shift his investments from equities to bonds. I told him NO, that would convert the paper loss to an actual loss and he would miss out on the subsequent recovery. I suggested he double down and invest more in equities now that the market was on sale. He ignored my advise and lost over 1/2 million. Sounds like you're on the same path.

  51. @nwsnowboarder There are some, who when viewing the machinations of the Fed and the Treasury and the financial industry in general, feel it is prudent to ensure the return OF their money rather than the return ON their money. In God we trust, all others bring cash.

  52. @Didier Yes, i sold alot of my equities too, at all time Highs, not at a loss as one of the responders indicates. We did not lose money, but realized substantial gains in our IRAs where we can hold it in safety for as long as we like. Some equities that provide good dividends and demonstrated long term goals/strategies remain excellent investments.

  53. With US national debt ($22.5T), corporate debt ($8T to $10T.. no one really knows...), and consumer debt (~$13.9T) all at record highs... and with 1 of 6 US businesses being a highly leveraged "zombie company" (not making enough profit to cover loan interest, much less paying back principal [at historically low rates]) - and the $200B that the fed just dumped into the system not included in any of this..., I sense the US financial system is as cash poor during this current "economic boom" as Donald "King of Debt" Trump was when he bankrupted his casinos. Our economy has a lot of good points, but the whole thing might be sitting on quicksand.

  54. Money created by the Federal Reserve comes from the U.S. Treasury and belongs to U.S. citizens, not global banks. We need to create legislation that changes how be Fed grows the money supply. The Fed Board should decide how much it wants to grow the money supply by, and divide it equally among all citizens. It could be electronically distributed by the Fed, IRS, or Social Security Administration. This would put money directly into the U.S. economy, since most people need to buy stuff or pay bills right away. This would give the Fed more direct control over the money supply, and put money in the pockets of U.S. consumers (who the money actually belongs to). This would grow the real economy from the ground up, instead of being used by the global mega-rich to manipulate the economy. The current system used by the Federal Reserve to control the money supply is not efficient and it's not fair. The interests of global banks is not aligned to the interests of We the People, and is no longer stabilizing world markets. At one time it may have been necessary to indirectly control the money supply through large banks, but in the days of the internet, that is no longer true. Throwing trillions of dollars of free money at global banks, that go and bet it on the global derivatives casino or create and pop asset bubbles for profit is not monetary policy. It's looting the U.S. Treasury to manipulate and loot the global economy. We need a fair and stable economy to thrive.