Reserves, RRP and The Libor Squeeze?
Following up on Libor Squeeze? and Libor and Reserves?...
Nobody is using UNSECURED viz FF and interbank lending, meanwhile LIBOR has been screaming to the upside.
With unsecured interbank lending (Fed Funds) dead, this worthy missive does not comment as to why LIBOR is screaming.
A potential explanation follows. Please bare with me as the following may sound counter intuitive...
Institutions parking funds at the Fed are tapping their "reserves" or "deposits" for quarter end turn premium.
Limited only by how much "reserves" they have parked at the Fed (JP Morgan is the king), controlled by collecting IOER (upper bound) and repo rates (lower bound).
Only Treasury securities (approx $2T held by the FED), are available for this purpose, NOT agency, MBS or any T security already involved in a term RRP (no rehypothecation there.)
An overnight RRP transaction shifts some of the liabilities on the Federal Reserve’s balance sheet from deposits held by depository institutions (also known as bank reserves), to reverse repos while the trade is outstanding.
In the process, the participants "deposits" or reserves get drawn down, viz CASH balances at the Fed rise, and systemic CASH liquidity for others gets scarce?
Thus, the cost of borrowing in CP, CD or Libor (Euro Dollar) jumps and becomes prohibitive unless one is desperate. It's like shooting fish in a barrel...
Is this why we have seen quarter end spikes in REPO? Those Fed ONRRP Treasury securities are being parlayed by the participants (it's a club and you ain't F-ing in it) into quarter turn premium?
Thus, in a very perverse way, making O/N RRP (overnight reverse repo) at the Fed the defacto liquidity reserves?
Moving forward, as excess reserves and Fed book continue to shrink, how does this affect systemic liquidity?
Speaking of turn and LIBOR premiums, did anyone notice the Fed proposed SOFR an alternative to LIBOR? FOMC announced SOFR in AUGUST 2017 with two other proposed rates, and finalized on Dec 8th, 2017.
Quarter end is coming and there's more than meets the eye, so TNN needs to dig deeper. More to come in A SOFR Squeeze? , stay tuned, no flippin.
"How many people say that the Fed is supplying treasury's (safe-assets or liquidity) when conducting RRPs? That's a reserve draining operation... RRs are not liquidity reserves (unlike the E-$ market)." - Salmo TruttaNormally and historically the statement above is correct. These days, things being what they are, nothing is NORMAL, and things are not what they seem, and that could be the whole point.
Nobody is using UNSECURED viz FF and interbank lending, meanwhile LIBOR has been screaming to the upside.
With unsecured interbank lending (Fed Funds) dead, this worthy missive does not comment as to why LIBOR is screaming.
A potential explanation follows. Please bare with me as the following may sound counter intuitive...
Institutions parking funds at the Fed are tapping their "reserves" or "deposits" for quarter end turn premium.
Limited only by how much "reserves" they have parked at the Fed (JP Morgan is the king), controlled by collecting IOER (upper bound) and repo rates (lower bound).
Only Treasury securities (approx $2T held by the FED), are available for this purpose, NOT agency, MBS or any T security already involved in a term RRP (no rehypothecation there.)
An overnight RRP transaction shifts some of the liabilities on the Federal Reserve’s balance sheet from deposits held by depository institutions (also known as bank reserves), to reverse repos while the trade is outstanding.
In the process, the participants "deposits" or reserves get drawn down, viz CASH balances at the Fed rise, and systemic CASH liquidity for others gets scarce?
Thus, the cost of borrowing in CP, CD or Libor (Euro Dollar) jumps and becomes prohibitive unless one is desperate. It's like shooting fish in a barrel...
Is this why we have seen quarter end spikes in REPO? Those Fed ONRRP Treasury securities are being parlayed by the participants (it's a club and you ain't F-ing in it) into quarter turn premium?
Thus, in a very perverse way, making O/N RRP (overnight reverse repo) at the Fed the defacto liquidity reserves?
Moving forward, as excess reserves and Fed book continue to shrink, how does this affect systemic liquidity?
Speaking of turn and LIBOR premiums, did anyone notice the Fed proposed SOFR an alternative to LIBOR? FOMC announced SOFR in AUGUST 2017 with two other proposed rates, and finalized on Dec 8th, 2017.
Quarter end is coming and there's more than meets the eye, so TNN needs to dig deeper. More to come in A SOFR Squeeze? , stay tuned, no flippin.
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