The Funding Storm Has Passed. Now What?
The funding storm has passed, but much work needs to be done to guard against volatility in short-term money markets.
That's the straightforward takeaway after another week of overnight repos and three term operations, which were upsized mid-week following oversubscriptions.
"Following the upsizing of both overnight and term repo offerings on Thursday and Friday after earlier operations that were oversubscribed, calm appeared to be returning to repo markets", Goldman wrote, in a note dated Fri
To paraphrase Ben Hunt, the global economy and markets are not a machine. They are a bonfire! You can know its general shape and properties, but cannot predict each lick of flame moment to moment.
Is it under control?? I have to admit, after spending way too much time on this issue, I’ve come away more confused, and in the company of a wide range of people who don’t have a clue about what’s happening. One issue that stands out is the Fed mischaracterizing itself playing a confusing straw man game, where the Fed obfuscates the mechanics of how collateral is regulated and distancing themselves from their role as the regulator … I can’t even explain what I mean, maybe because all the players in this game are distorting the perspectives of this mess. This circus does seem to be adding more and more lobbying people that are hyping the need for more massive reserves — so that in itself shines a light on the Fed’s desire to expand a bloated balance sheet. Here’s a few more confused experts:
==> “Thus, if the problem is that liquidity is being hoarded, creating pressures in the repo market, it’s a dearth of Treasuries plus reserves that’s the problem. That can’t be fixed by having the Fed swap reserves for Treasuries – that has zero effect on the total. Some people have tried to make the case that reserves are somehow significantly superior liquid assets to Treasury securities, and that liquidity requirements have increased the demand for reserves in particular. But that notion is inconsistent with what we see in the data.
As I pointed out in this blog post, banks have accumulated a lot of Treasuries, and a lot of reserves, but are not demanding a premium in the market to hold Treasuries – indeed, it’s currently the other way around. That is, T bill rates are below IOER.
On the second, there’s no evidence that QE is helpful in achieving any of the Fed’s ultimate goals, and it may just be harmful, in that the Fed swaps inferior reserves for superior Treasury securities. The reserves are crappy assets because they’re only held by a segment of financial institutions, and because of the market frictions I’ve been discussing. If the Fed takes away good collateral and gives the financial market crappy assets, nothing good happens.
In the long run, the Fed should get rid of the large balance sheet. Please. Make the secured overnight financing rate the policy rate, and run a corridor system. That’s what normal central banks do.
https://newmonetarism.blogspot.com/2019/09/the-feds-failed-experiment.html
==> Here’s what I just saw at Yardini’s latest publication on usfeddebt, a pdf. All the charts are very interesting but there is a mind-blowing chart (Figure 20) named Banks: US Treasury & Agency Securities (billion dollars, yearly change). It basically shows the the September 2019 percent change as being off the chart, like about a 500% change, according to whatever he used.
Here’s my FRED chart, showing closer to 300*
https://fred.stlouisfed.org/graph/?g=p12M
Then, this chart is interesting, i.e., the percent change from a year ago between bank holdings and repo, pretty crazy:
https://fred.stlouisfed.org/graph/?g=p135
==> Translated into English, banks are worried that if they have a bunch of Treasuries, even earning higher yields, and they try to sell their Treasuries for reserves, they might take a loss if everyone is trying to sell Treasuries at once to get their hands on reserves. Another way of framing this is that banks are worried that in the next liquidity crunch, interest rates are going to rise instead of fall (Treasuries going down in price instead of up).
https://seekingalpha.com/article/4259242-feds-idea-treasury-repo-facility-will-work
Perhaps my previous post had too many links, or maybe just a glitch?
Here’s what I just saw at Yardini’s latest publication on usfeddebt, a pdf. All the charts are very interesting but there is a mind-blowing chart (Figure 20) named Banks: US Treasury & Agency Securities (billion dollars, yearly change). It basically shows the the September 2019 percent change as being off the chart, like about a 500% change, according to whatever he used.
I went to FRED and duplicated his work, but came up closer to a 300% increase.
Then, this chart is interesting, i.e., the percent change from a year ago between bank holdings and repo, pretty crazy and not sure what it implies
https://fred.stlouisfed.org/graph/?g=p135
Vissy posting as anon
Filter holds comments with more than two links to guard against spam. Sorry for the delay
Sorry for repost and not wanting to cause trouble. I have a fairly lengthy comment about Fed’s Andolfatto which I’ll add later, but will give this a rest. I’m trying to not add links when possible, so thanks for your patience. Have a nice day, thanks.
Here’s a FRED chart showing this train wreck, with the train coming around the bend, then catching fire, then exploding and then sliding off the bridge and into the river, just like the closing of The Bridge on the River Kwai:
https://fred.stlouisfed.org/graph/?g=p1i9
OK, maybe the best day yet on Heisenberg Report, well done!