Nuance and Timing?

Continuing from yesterday's That's The Signpost Up Ahead?

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. 

As noted on August 12th in Fed Cuts: Accommodative? and for good measure repeated YESTERDAY...

"Long term yields should drop further, quarter end rucks will cause short duration funding cost spikes (cost of loan funds), especially in September (think in anticipation of Chinese banks closing for golden week Oct 1st)... Seasonal monetary flow factors were already set to collapse into the 2nd half. Additional liquidity drains: TGA restock, $1T UST issuance by YE."

Yesterday, Monday...

On Monday, the rate on overnight GC repo soared by as much as 248 basis points to 4.75%, the highest level since December, according to ICAP pricing, amid the settlement of Treasury coupon auctions... 

Separately, the Secured Overnight Financing Rate, which is backed by overnight GC repo transactions, rose to 2.43% Monday from 2.20%, New York Fed data show. That’s the highest since July 31. 

As our faithful readers will attest to, can't say nobody gave warning, and as they say timing is everything?  We wrote the following yesterday AM for posting today...

Explaining the nuances of yesterday's post... With the FX hedged (JPY, EUR) UST buyers being priced out due to the more important inversion in October 2018, the already UST inventory bloated dealers are on the hook to buy the $800B surfeit of issuance coming down the auction pipe.

Lacking any margin buyers, there will be little to no balance sheet capacity for those dealers to fund or make other market activities, think the non banks. 

To prevent a freeze in repo (either or both tri-party repo and FICC sponsored bilateral) the Fed could be forced into conducting open repo and/or being the buyer of last resort = QE4. 

Today, Tuesday...

U.S. money-market interest rates surged for a second day Tuesday as cash reserves in the banking system remained out of balance with the volume of securities on dealer balance sheets. 

The rate on overnight general collateral repurchase agreements soared by more than 600 basis points to 8.75%, based on ICAP pricing, before settling back around 7.25%. Surges are commonplace only around quarter- and month-end, so market participants had expected things might return to normal. 

“This is certainly painful for firms that have to fund positions.” - Bloomberg

We also wrote this yesterday for posting today...

If selling commences and volume picks up, it won't take a Lehman, just a couple of ETF's in "forced" selling mode for the system to have a Minsky moment. TBD between now and late January.

Today, and now this...

In accordance with the FOMC Directive issued July 31, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct an overnight repurchase agreement (repo) operation from 9:30 AM ET to 9:45 AM ET today, September 17, 2019, in order to help maintain the federal funds rate within the target range of 2 to 2-1/4 percent. 

This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion. Securities eligible as collateral in the repo include Treasury, agency debt, and agency mortgage-backed securities.

Looks like we're not the only one taking notice? One can tell the state the market is in? Or one just had a rush of blood to the head and this is a Warning Sign?


More to come in A Wayward Italian In Kansas?, stay tuned, no flippin.