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Statement Regarding Repurchase Operations

newyorkfed.org

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Re: Statement Regarding Repurchase Operations

#81

Post by jey »

JumpCrisscross wrote: post #74
SilasX wrote: post #12

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-tim…

> The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9% Lender of last resort is one of the most essential roles of the Federal Reserve. Banks borrowing against Treasuries is almost entirely dictated by liquidity, not solvency.

> Banks borrowing against Treasuries is almost entirely dictated by liquidity, not solvency.

Can you unpack/explain this claim further?

Re: Statement Regarding Repurchase Operations

#82

Post by beezle »

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...

Re: Statement Regarding Repurchase Operations

#83

Post by helen___keller »

CyanLite4 wrote: post #79

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 b…

> 2) This isn’t $165b. It could be the same $75b used every day.

I made the $165b comment, my understanding is that there's four overlapping liquidity injections (three 14-day operations and the recurring overnight operation). Would this not be 30 + 30 + 30 + 75?

Re: Statement Regarding Repurchase Operations

#84

Post by lawn »

atemerev wrote: post #31
situational87 wrote: post #29

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.

Banks are there to give capital to businesses, which do solve every single problem from the beginning of capitalism. This is how it works.

Pure capitalism does not "solve every single problem"...

Re: Statement Regarding Repurchase Operations

#85

Post by beezle »

motohagiography wrote: post #22

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 que…

This isn't about counterparty issues. That was Lehman in 2008. This is a systemic liquidity shortage.

Re: Statement Regarding Repurchase Operations

#86

Post by omegaworks »

haidut wrote: post #65
motohagiography wrote: post #22

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 que…

>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. And what might that massive geopolitical conflict be?

Hong Kong

Re: Statement Regarding Repurchase Operations

#87

Post by haidut »

omegaworks wrote: post #86
haidut wrote: post #65

Earlier quoted context omitted.

>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. And what might that massive geopolitical conflict be?

Hong Kong

Thanks. There could be others. The bombing of Saudi Arabian oil fields and a war with Iran comes to mind. Let's see what the OP had in mind. Maybe it is something else entirely.

Re: Statement Regarding Repurchase Operations

#88

Post by whatok »

SilasX wrote: post #71
whatok wrote: post #68

Earlier quoted context omitted.

Your last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets. There is a lot of leverage in repo financed trades and 36bps absolutely does make a difference.

Then maybe you could use your superior understanding to convey the relevant insights, rather than just assert that they exist.

There's no need to get sarcastic about things. If I said at work what you posted about 36bps not mattering I would get fired on the spot. It shows a fundamental lack of understanding of the topic but for whatever reason you are asserting very strong opinions on the topic.

ON repo usage outside of FICC [1] members is quite often used to finance leveraged low margin transactions. Given information provided so far and what has been observed in the markets, one of the common theories of what caused ON to spike is Treasury basis [2] trades. Given the magnitude and speed of the ON spike and current positioning [3], this theory makes a lot of sense. If this is one of the causes, a spike in ON absolutely matters and isn't just a rounding error.

[1] https://www.investopedia.com/terms/f/ficc.asp [2] https://www.cmegroup.com/education/courses/introduction-to-t... [3] https://www.cftc.gov/dea/futures/financial_lf.htm

Re: Statement Regarding Repurchase Operations

#89

Post by whatok »

jey wrote: post #81
JumpCrisscross wrote: post #74

Earlier quoted context omitted.

> The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate against being viciously squeezed to 9% Lender of last resort is one of the most essential roles of the Federal Reserve. Banks borrowing against Treasuries is almost entirely dictated by liquidity, not solvency.

> Banks borrowing against Treasuries is almost entirely dictated by liquidity, not solvency. Can you unpack/explain this claim further?

Solvency = credit risk in this case. If my counterparty doesn't pay me back, I can just liquidate the collateral which in this case are Treasuries. Given that these are overnight transactions, I'm probably not exposed to too much price volatility if I had to.

People aren't worried about getting their money back. There just isn't enough money floating around to lend out.

Re: Statement Regarding Repurchase Operations

#90

Post by whatok »

SilasX wrote: post #80
JumpCrisscross wrote: post #75

Earlier quoted context omitted.

> banks don't trust each other's collateral, but the Fed does, and that judgment is more correct? The collateral is Treasuries. Nothing exotic.

Then why are banks not trusting that as collateral?

I don't think banks not trusting Treasuries as collateral has ever been raised this week. Banks simply do not have the liquidity to finance transactions in the repo market right now.
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