The Million Dollar Bloodhunt?
Our unprecedented in depth coverage of the repo ruckus continues, following up on the Man With No Name in Part 6: The Devil's Dollar Sign? To limit today's Nattering in Part 7, as to IOER, asset swaps and the distinction between inside and outside money, all Nattering for another day. Moving West...
With The Million Dollar Bloodhunt in mind... Here's a hint re: those creme de la creme auction rate government securities... With perhaps the exception of the 30 yr bond, it costs more to fund a UST in repo than the instrument returns on yield. Said "condition" is called negative carry, and why would anyone want to hold such an instrument?
Review time.... in A Negative Disposition?, A Wayward Italian in Kansas? and First Rule Of Bond Market: You Do Not Talk About Keynes? we Nattered about the conditions which make negative interest rates possible, and distinctions as to why anyone would want to hold such instruments. Here's another hint re: reserves...
In repo, a negative repo is neither abnormal nor unusual. When there is exceptional demand and/or shortage of a certain type of collateral, it can become "special" at a rate below GC repo. Negative repo rates occur when the BUYER who is lending cash (to a dealer) in order to buy (rent) collateral (from the dealer) and wants the collateral so badly, they do so at a loss by paying the dealer interest (premium) on the rental. With that negativity fresh in mind...
Increases and spikes in repo fails send one of two messages, the "bad" message was last heard loud and clear in 2008, viz. we won't touch that with a ten foot poll. The "good" message or lesser of the two evils? Repo (interbank) counterparties would rather hold the rented "creme de la creme" hostage, than retrieve their reserves (FRB credit) which they may be paying the dealer (negative repo) to hold, in order to obtain said collateral. Fathom that distinction and the not so subtle implications...
The outside "money" or FRB credit is elastic, the collateral or "money substitute" has become inelastic, and Cash is not King. What else would one expect in an upside down central bankers world, wrought with fun house mirror price distortions, constricted liquidity and shrinking economic output potential. Brings this prescience to mind...
Concomitant to the above, and in advance of September 16th, knowing what was coming down the pipe, tax pymts, UST issuance, TGA restock, etc. "The Jamie Gang" drew down its cash, then sat around drinking sarsaparilla at the Lender of Last Resort Saloon? Waiting for what? And now this...
Not really, dem varmints was just followin da rules, while stockpilin collateral insurance for a rainy day? In their position, and regardless of NEGATIVE carry costs or YIELDS to hold such instruments, might one do the same? Another distinction hopefully not lost on the "why negative yield" challenged. Moving West...
To resolve this problem, the Sheriff will take away the collateral which would seem to be most in demand... Wuck? Indeed, lets buy those UST's (short term bills) coveted for balance sheet and liquidity purposes. Yes, drive down those short end yields, drive up the price, widen spreads with lesser collateral, while crediting the primary dealer accounts with reserves?
In effect supply more of what is unwanted - elastic reserves, and withdraw the very thing which there is a seeming dearth of, inelastic collateral reserves. With counter intuitive statements viz. "active management of the supply of reserves is NOT required" and actions being taken, this begs some questions. This is called "stimulus"?
Since the repo ruckus of September 16th, everything's Jake or Jamie? The storm's past, nothing to worry about? With regard to the current market intervention, aside from a potential worsening of liquidity conditions, what could go wrong, or what's REALLY going on? Why are efforts being escalated, if symptoms do not persist? Or do they?
Much like a cat crappin on a marble floor, is the Fed buying time while somebody is desperately trying to bury something nasty to no avail? Pregnant pause... drum roll please. Is that why yesterday afternoon, the NYFRB upped term repo from $35bln to $45bln; and o/n repo from $75bln to $120bln? Next week another "one and done" or "mid term" rate cut? Any of this sound vaguely reminiscent of August 2007?
As we keep Nattering, it just keeps on getting better and you just can't make shit like this up. Is there something in this more than natural? Perhaps something is rotten in Denmark? More to come when the Man With No Name returns in Part 8: Blood For a Dirty Dollar? Stay tuned, no flippin.
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
The Good, The Bad And The Ugly?
A Coffin Full Of Dollars?
A Dollar To Die For?
The Devil's Dollar Sign?
Jamie's Cryin Wolf?
Why Didn’t Dimon Step In on Repo? Just Ask the Fed
A Negative Disposition?
A Wayward Italian in Kansas?
First Rule Of Bond Market: You Do Not Talk About Keynes?
Half Baked Hopes Souffle?
Collateral Reserves: What Is Behind Record Low and Negative Yields
Prior to the GFC, repo markets functioned on a paucity of reserves and collateral (albeit different regulatory capital requirements) as compared to today's increased Trillions in balances and float. The problem is dealers drawing down cash, reserve levels or a lack of HQLA UST collateral? Au contraire, there are distinctions...What is the real problem? Perhaps certain market participants such as the infamous "Jamie Gang" ride again with a bag o cats on The Million Dollar Bloodhunt...
Review time.... in A Negative Disposition?, A Wayward Italian in Kansas? and First Rule Of Bond Market: You Do Not Talk About Keynes? we Nattered about the conditions which make negative interest rates possible, and distinctions as to why anyone would want to hold such instruments. Here's another hint re: reserves...
To hold deposits or CASH BALANCES under LCR for "operational" purposes, the banks are assessed an enhanced liquidity premium (matching against HQLA, leverage ratio and GSIB assessment) over and above auction rate government securities. - The Good, The Bad And The Ugly?LCR requirements and negative carry are not new, repo functioned somewhat without Fed intervention until September 16th, so what's the real problem? And now as previously promised, a little sumpin extra special...
In repo, a negative repo is neither abnormal nor unusual. When there is exceptional demand and/or shortage of a certain type of collateral, it can become "special" at a rate below GC repo. Negative repo rates occur when the BUYER who is lending cash (to a dealer) in order to buy (rent) collateral (from the dealer) and wants the collateral so badly, they do so at a loss by paying the dealer interest (premium) on the rental. With that negativity fresh in mind...
Increases and spikes in repo fails send one of two messages, the "bad" message was last heard loud and clear in 2008, viz. we won't touch that with a ten foot poll. The "good" message or lesser of the two evils? Repo (interbank) counterparties would rather hold the rented "creme de la creme" hostage, than retrieve their reserves (FRB credit) which they may be paying the dealer (negative repo) to hold, in order to obtain said collateral. Fathom that distinction and the not so subtle implications...
The outside "money" or FRB credit is elastic, the collateral or "money substitute" has become inelastic, and Cash is not King. What else would one expect in an upside down central bankers world, wrought with fun house mirror price distortions, constricted liquidity and shrinking economic output potential. Brings this prescience to mind...
As return on inside money (typically short duration) is less than outside money (IBDD or IOER) which is contractionary, balance sheet roll off, IOER (interest on excess reserves) and RR (reverse repo) rates are a much more important story than FFR. - June 19th - Half Baked Hopes Souffle?So might the negative carry on those UST's be worth it? Ask Jamie Dimon who warned five times during 2018 of an impending explosion in yields reaching 5% on the 10 yr. All the while backing up his JPM collateral truck to stock up on holdings of UST +105bln or 155%. Moving West in this $2 Trillion Dollar (Repo) Bloodhunt?
Concomitant to the above, and in advance of September 16th, knowing what was coming down the pipe, tax pymts, UST issuance, TGA restock, etc. "The Jamie Gang" drew down its cash, then sat around drinking sarsaparilla at the Lender of Last Resort Saloon? Waiting for what? And now this...
"Once the initial scare had passed, guess who began offering more money in the repo market? JPMorgan, according to executives in the market who spoke to Bloomberg News. As Dimon said, it did the same thing during last year’s fourth quarter, after repo rates exceeded what the Fed offers banks on reserves, known as the interest rate on excess reserves, or IOER." - BloombergThe Fed Sheriff's were "forced" to ride into town to inject cash with "QE lite", repo and collateral with RRP, and play market maker because "The Jamie Gang" would not? Did someone say there was a capital requirement induced liquidity problem? Did those ruthless dirty double dealers create a general collateral strike to make a subtle, yet distinct point to the Fed Sheriff?
Not really, dem varmints was just followin da rules, while stockpilin collateral insurance for a rainy day? In their position, and regardless of NEGATIVE carry costs or YIELDS to hold such instruments, might one do the same? Another distinction hopefully not lost on the "why negative yield" challenged. Moving West...
To resolve this problem, the Sheriff will take away the collateral which would seem to be most in demand... Wuck? Indeed, lets buy those UST's (short term bills) coveted for balance sheet and liquidity purposes. Yes, drive down those short end yields, drive up the price, widen spreads with lesser collateral, while crediting the primary dealer accounts with reserves?
In effect supply more of what is unwanted - elastic reserves, and withdraw the very thing which there is a seeming dearth of, inelastic collateral reserves. With counter intuitive statements viz. "active management of the supply of reserves is NOT required" and actions being taken, this begs some questions. This is called "stimulus"?
Since the repo ruckus of September 16th, everything's Jake or Jamie? The storm's past, nothing to worry about? With regard to the current market intervention, aside from a potential worsening of liquidity conditions, what could go wrong, or what's REALLY going on? Why are efforts being escalated, if symptoms do not persist? Or do they?
Much like a cat crappin on a marble floor, is the Fed buying time while somebody is desperately trying to bury something nasty to no avail? Pregnant pause... drum roll please. Is that why yesterday afternoon, the NYFRB upped term repo from $35bln to $45bln; and o/n repo from $75bln to $120bln? Next week another "one and done" or "mid term" rate cut? Any of this sound vaguely reminiscent of August 2007?
As we keep Nattering, it just keeps on getting better and you just can't make shit like this up. Is there something in this more than natural? Perhaps something is rotten in Denmark? More to come when the Man With No Name returns in Part 8: Blood For a Dirty Dollar? Stay tuned, no flippin.
Recommended Reading:
A Fistful Of Dollars?
For A Few Dollars More?
The Good, The Bad And The Ugly?
A Coffin Full Of Dollars?
A Dollar To Die For?
The Devil's Dollar Sign?
Jamie's Cryin Wolf?
Why Didn’t Dimon Step In on Repo? Just Ask the Fed
A Negative Disposition?
A Wayward Italian in Kansas?
First Rule Of Bond Market: You Do Not Talk About Keynes?
Half Baked Hopes Souffle?
Collateral Reserves: What Is Behind Record Low and Negative Yields
Comments