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.
Statement Regarding Repurchase Operations
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Re: Statement Regarding Repurchase Operations
#22What 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.
Re: Statement Regarding Repurchase Operations
#23Re: Statement Regarding Repurchase Operations
#24I 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?
From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary dealers having to purchase the difference. They don't purchase USTs from cash on hand. Instead, they use the repo market to fund the purchase. However, the supply of repo market funds is relatively inelastic. Thus, you have a big spike in repo demand with a relativ…
It seems to me that the issue is that there has been an increase in supply, because of the massive deficit. This means that there are more US Treasuries for sale than there are buyers. They could sell more by letting the interest rate rise, but that would have major negative effects if a large increase is required.
Re: Statement Regarding Repurchase Operations
#25Wow 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…
I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describ…
Why is there such a liquidity crunch though?
And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that
Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only explanation I can think of is that some of the lenders believe that some of the creditors are about to default
Re: Statement Regarding Repurchase Operations
#26Earlier quoted context omitted.
From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary dealers having to purchase the difference. They don't purchase USTs from cash on hand. Instead, they use the repo market to fund the purchase. However, the supply of repo market funds is relatively inelastic. Thus, you have a big spike in repo demand with a relativ…
It seems to me that the issue is that there has been an increase in supply, because of the massive deficit. This means that there are more US Treasuries for sale than there are buyers. They could sell more by letting the interest rate rise, but that would have major negative effects if a large increase is required.
The increased supply of UST is another contributing factor, yes. Important point AFAICT is the supply inelasticity of repo funds.
Re: Statement Regarding Repurchase Operations
#27Earlier quoted context omitted.
I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describ…
Why is there such a liquidity crunch though? And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only expl…
Shades of LTCM.
Re: Statement Regarding Repurchase Operations
#28To 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-tim…
> $3.6 million per 1 billion
How many of those billions are being borrowed?
The Fed is putting up $165 billion to help the market. So we can assume the market is at least that large.
If we use your 3.6 million per billion figure, that's $600 million.
Of course, the fed isn't the entire market, so we're probably talking a rescue worth several billion dollars. Hardly a rounding error.
Re: Statement Regarding Repurchase Operations
#29Could 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.
Re: Statement Regarding Repurchase Operations
#30Wow 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…
I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describ…
Aren't the haircuts and interest rates just flip sides of the same coin, though? You can express risk in either language, and if either is rising that means that the evaluation of risk has risen too.
I don't know that this really makes me personally feel better.