For A Few Dollars More?
Following up on the Man With No Name in A Fistful Of Dollars? in which we examined events which led up to and occurred the week of September 16th. In Part 2 of our "blood money" repo ruckus series we examine what happened as a result. Engines do not seize for "mysterious" reasons, components fail due to heat stress, usually created by inefficiencies and/or a lack of lubricant, and somebody holding out For A Few Dollars More...
With For A Few Dollars More in mind, from Monday, September 16th That's The Signpost Up Ahead?
Far right above, note the yield spike, commencing Friday as the one month suffered the "collateral damage" of a +10bps spike.
On Monday and Tuesday, if there had been less supply and/or greater demand for those tenors, the price would have risen, and yields would have fallen. Instead the opposite occurred on all tenors less than one year which one can also see below in the Treasury Daily Bill Rate chart.
One can also see that none of the tenors 1yr+ had significant movement in their yield. This means that on Monday and Tuesday there was less demand and plenty of supply for UST's under 1 yr tenor viz. on the run, short term inside money equivalents.
And in fact Monday's volume in FFR (which also spiked) was the lowest since June 30th, 2016. The ensuing spike in repo rates was YUGE, a 35 standard deviation move which pushed SOFR to 9% at 99th percentile on Tuesday.
Does one call this stable? This "non volatile" benchmark rate is supposed to replace LIBOR? One can only imagine what kind of waves a 35 SD tsunami might cause in derivatives based upon such a rate? Moving West...
Starting Tuesday, the NYFRB repo market injection of $278 bln in CASH for treasury and agency paper decreased the UST bloat, and increased dealer cash balances for the overnight collateral repo rental. This injection wetted demand as UST prices rose while yields fell from Wednesday on.
As a result of the above market intervention, market making "friction" or constriction was reduced, and the price of GC repo collateral and associated rates also declined. Above we can see a clear exogenous shock, and a temporary remedy.
Bottom line, a bunch of cash flowed out, while a bunch of debentures attempted to flow in, creating a mismatch. When T-Bills got purchased and/or flowed to fund TGA balances at the Fed, bank deposits and reserves got drained just like an o/n RRP...
and at the very moment the Dealers needed those reserves or cash to fund or absorb additional UST holdings, they had to go to repo to borrow the cash, helping to blow GC rates out. But how and why?
What do you mean your "fully booked up"? Sorry Sir, but your odds of getting cash for that collateral? Slim and none, and Slim just left town? The market makers would only take the risk of holding "safe" UST overnight "for a few dollars more?"
Shades of August 2007 and less desirable collateral comes to mind? and/or is there a systemic design flaw, defect or inefficiency, which might affect market participants ability and willingness to trade?
The ever "dependable, honest" and predictable NYFRB "sheriffs" were on the scene taking care of business? Lucky for us?
More to come when the Man With No Name returns in The Good, The Bad And The Ugly? In Part 3 of our "blood money" repo ruckus series we examine potential causes for what happened in repo the week of September 16th. Stay tuned, no flippin.
With month end, quarter end, Chinese Golden Week (Oct 1- 7th) funding needs, and seasonal ROC in monetary flow coming to a crawl... a dearth of dollar "liquidity" stemming from a dearth of dealer balance sheet capacity, could turn into a major shit show and soon.And how, as on Monday September 16th, the bid-to-cover ratio at the three month T-bill sale (money market) was the lowest in a month, resulting in an interest rate at the highest in three weeks. The six-month auction BTC was the lowest since Aug. 5 with its interest rate reaching the highest in six weeks. See below...
On Monday and Tuesday, if there had been less supply and/or greater demand for those tenors, the price would have risen, and yields would have fallen. Instead the opposite occurred on all tenors less than one year which one can also see below in the Treasury Daily Bill Rate chart.
Does one call this stable? This "non volatile" benchmark rate is supposed to replace LIBOR? One can only imagine what kind of waves a 35 SD tsunami might cause in derivatives based upon such a rate? Moving West...
Starting Tuesday, the NYFRB repo market injection of $278 bln in CASH for treasury and agency paper decreased the UST bloat, and increased dealer cash balances for the overnight collateral repo rental. This injection wetted demand as UST prices rose while yields fell from Wednesday on.
As a result of the above market intervention, market making "friction" or constriction was reduced, and the price of GC repo collateral and associated rates also declined. Above we can see a clear exogenous shock, and a temporary remedy.
Bottom line, a bunch of cash flowed out, while a bunch of debentures attempted to flow in, creating a mismatch. When T-Bills got purchased and/or flowed to fund TGA balances at the Fed, bank deposits and reserves got drained just like an o/n RRP...
and at the very moment the Dealers needed those reserves or cash to fund or absorb additional UST holdings, they had to go to repo to borrow the cash, helping to blow GC rates out. But how and why?
Those half dozen items concomitantly affect: a reduction in money fund cash to be invested in reverse repos; an increase in securities needing to be financed in the repo market; and pressure on and constriction of systemic bank liquidity.
Last week, said triple whammy constituted an exogenous shock on the system. But how? What was the mechanism for this seeming dislocation in supply and demand? Did somebody make "a fistful of dollars"? A Fistful Of Dollars?How did a confluence of events which affected a rate of change (ROC delta) in cash (-) and collateral (+) volumes effect said exogenous shock? With a surfeit of collateral on hand, and oodles of cash stashed in IOER and RRP, where were the guys "dealers" who were supposedly holding said money?
What do you mean your "fully booked up"? Sorry Sir, but your odds of getting cash for that collateral? Slim and none, and Slim just left town? The market makers would only take the risk of holding "safe" UST overnight "for a few dollars more?"
Shades of August 2007 and less desirable collateral comes to mind? and/or is there a systemic design flaw, defect or inefficiency, which might affect market participants ability and willingness to trade?
The ever "dependable, honest" and predictable NYFRB "sheriffs" were on the scene taking care of business? Lucky for us?
More to come when the Man With No Name returns in The Good, The Bad And The Ugly? In Part 3 of our "blood money" repo ruckus series we examine potential causes for what happened in repo the week of September 16th. Stay tuned, no flippin.
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