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So change the compliance rules or find ways to get the money to go where its needed.
If the problem is a lack of money and the Feds only tool is to print more of the stuff, then this has to be a fixable problem .......
As usual passing the buck and putting the blame for JPM stepping away from the repo market - and catalyzing the Sept 16 repo rate explosion - on regulators, Dimon said his firm had the cash and willingness to calm repo markets when they went haywire in September, but regulations held it back.
Meanwhile, as part of stepping away from the repo market, JPMorgan succeeded in forcing the Fed to restart not only repo operations, but also QE. As a result, the Fed began daily liquidity injections, and even as repo rates have since returned to more normal levels, the Fed has also resumed purchases of Treasuries to bolster bank reserves.
It's also why Jamie Dimon is hoping to fully deregulate the financial system, so that he has no longer has any constraints on what his balance sheet should look like. And if regulators needs a little more "convincing", JPM is happy to crash the repo market as many times as is necessary.
November 14, 2019
The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released the schedule of repurchase agreement (repo) operations for the monthly period from November 15, 2019 through December 12, 2019. In accordance with the most recent FOMC directive, the Desk will continue to offer at least $35 billion in two-week term repo operations twice per week and at least $120 billion in daily overnight repo operations.
The Desk will also offer three additional term repo operations during this calendar period with longer maturities that extend past the end of 2019. These additional operations are intended to help offset the reserve effects of sharp increases in non-reserve liabilities later this year and ensure that the supply of reserves remains ample during the period through year end. They are also intended to mitigate the risk of money market pressures that could adversely affect policy implementation. The Desk will adjust the timing and amounts of repo operations as necessary to maintain an ample supply of reserve balances over time and based on money market conditions, consistent with the directive from the FOMC.
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Dealers submitted $42.550BN in bids for the 42-day op ($29.750BN in Treasurys, $1BN in Agency, $11.8BN in MBS paper), resulting in an oversubscription of the $25BN in available repo.
This was modestly below the $49.050 billion submitted in the first 42-day repo operation conducted on November 25.
It remains a key question for funding markets why, even with QE4 in place and now daily overnight and short-term repo operations in place, banks continue to rush to lock in year-end liquidity ...
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The repo turmoil that put traders on edge in September has prompted a full scale review by regulators, who identified disruptions to short-term funding markets as a potential risk to the U.S. financial system.
The Financial Stability Oversight Council is calling for federal agencies to collect data and scrutinize cleared repurchase transactions to determine what prompted rates to spike three months ago, according to Treasury Department officials. The group, led by Treasury Secretary Steven Mnuchin, highlighted the examination in its annual report released Wednesday.
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The repo market is ‘broken’ and Fed injections are not a lasting solution, market pros warn
... Paresh Upadhyaya, director of U.S. currency strategy at Amundi Pioneer.
But Upadhyaya also sees potential knock-on effects from the Fed’s stabilization efforts, including short term yields being pressured lower and investors taking advantage of the liquidity to rotate to riskier assets, as the central bank’s share of the T-bill market expands to an estimated 20% of the market by mid-2020 from 1% currently.
“We’re very much on track for that,” he said.
...
If we’re right about funding stresses, the Fed will be doing “QE4” by year-end: the safe asset – U.S. Treasuries - is funded by RV hedge funds on the margin and if the FX swap market pulls balance sheet and funding away from them, the safe asset will go on sale. Treasury yields can spike into year-end, and the Fed will have to shift from buying bills to buying what’s on sale – coupons.
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The Fed became lender of last resort to dealers as J.P. Morgan ran out of reserves to lend, and the primary financier of the government as $250 of the $275 billion of the reserves that’s been put into the system since September ended up in Treasury’s general account (see Figure 1). Thus, all that the Fed’s liquidity operations have done to date is to ensure that the Treasury’s cash needs don’t drain further liquidity from banks’ HQLA portfolios, but it did not inject excess reserves into the banking system ahead of the year-end turn.
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But what are the signs that Pozsar is looking at, to determine that a liquidity crunch is imminent? There are two key leading indicators that serve as an advance warning that all hell may be about to break loose.
The first thing to watch to determine if the repocalypse 2.0 is about to hit, is the repo rate itself.
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The second, and perhaps more critical indicator of a coming market crisis, are FX swaps.
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Naturally, the most accurate indicator that the FX swap market is starting to freeze, are cross-currency basis swaps themselves. And, as the chart below shows, both EUR and JPY 3-month swaps have started to push sharply wider in recent weeks. As Bloomberg points out, the premium to swap Japanese yen into US dollars for three months - a bet on rising dollar scarcity - widened more than 4 bps to the highest level in seven weeks, while the a similar spread to convert euros into dollars expanded by as much as 6 bps.
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Looking at the charts above, there is good news in that none of the current reads are remotely as apocalyptic as Pozsar is making them. However, there are three critical dates in the coming week that could results in a violent move wider in both swaps and repo rates, which would then instantly cascade to the rest of the market. They are the following:
- December 12 - the Fed will announce the details of the next round of Fed RP Operations. As Curvature's Scott Skyrm noted yesterday, "I look for the Fed to announce a $50 billion (at least) term operation for Monday, December 23 and a $50 billion (at least) term operation for Monday, December 30. If the Fed announces operations of $25 billion or less on those days then Turn rates will immediately spike higher."
- December 15 - China tariff decision. While not directly linked to the repo market, an adverse outcome here would result in a sharp drop in risk assets, tightening in financial conditions and a spike in the dollar, which would have an indirectly adverse impact on bank liquidity, potentially exacerbating the underlying funding shortage.
- December 16 - Treasury tax remittance. A major liquidity drain, if the level of reserves is indeed catastrophically low this event could trigger a blow out in repo rates as banks transfer reserves to the Treasury. As a reminder, many attributed the first repocalypse to a tax payment made on Sept 16.
Together, these three events could potentially have a direct impact on financial conditions, on reserve levels, and by extension, could catalyze the repocalypse that Pozsar is confident is now coming.
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In this step by step analysis, we will put together the week by week numbers from the Fed and the Treasury, uncover what is being hidden behind a veil of complexity, and show the simple truth - about 90% of recent federal government deficit spending has effectively been funded at below market rates by simply creating the new money.
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It looks like the year-end repocalypse that was predicted by Credit Suisse strategist Zoltan Pozsar is not going to happen this year after all.
Today's Term Repo which matures on January 7 saw $28.8BN in security submissions ($13.85BN in TSYs, $14.95BN in MBS), below the $35BN in total availability.
As such, this was the second term repo since the start of the Fed's emergency repo program that covered the year-end "turn" with a maturity of Jan 2, and was not fully overalotted. ...
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In his latest comment on the repo market, Curvature's Scott Skyrm noted that "once the term RP operations switch to being undersubscribed, it either means most of the Street's year-end funding need is fulfilled, or banks are close to their balance sheet limits." ...
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Meanwhile, despite the lack of oversubscribed repo for two operations in a row, repo doomsayer Pozsar refuses to throw in the towel and in an interview posted by Bloomberg on Friday, the Credit Suisse analyst said "it's not over" yet, saying that "if the yearend is less of a problem because of the repo bazooka we got from the Fed, and if the message of my report played a part in getting that bazooka, then that’s a nice way to be proven wrong." However, he then added ominously that "now we’re getting into a point in the year when balance-sheet problems are going to flare up, and I think the system will get gummed up again."
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... the Fed is now actively monetizing debt the Treasury sold just days earlier using Dealers as a conduit... a "conduit" which is generously rewarded by the Fed's market desk with its marked up purchase price.
In other words, the Fed is already conducting Helicopter Money (and MMT) in all but name. As shown above, the Fed monetized T-Bills that were issued just three days earlier - and just because it is circumventing the one hurdle that prevents it from directly purchasing securities sold outright by the Treasury, the Fed is providing the Dealers that made this legal debt circle-jerk possible with millions in profits, even as the outcome is identical if merely offset by a few days.
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... the Fed announced that Dealers are once again scrambling for liquidity, submitting $41.12BN in securities ($30.7BN in TSYs, $10.42BN in MBS) into today's 2-week repo operation, which was oversubscribed hitting the maximum operation limit of $35BN.
...
... as Curvature Securities' Scott Skyrm writes in his daily Repo Market Commentary note ...
... the market had gotten addicted to the easy Fed liquidity unleashed in September (via temporary repo ops), and then again in October (via permanent T-Bill purchases).
As Skyrm writes, "it's easy to see how the Repo market can get addicted to easy cash from the Fed when the stop-out rates for the RP operations are 1.55% - behind the offered side of the market."
But, as the repo strategist adds, as the Fed keeps injecting cash, the market gets used to it.
Which is great in the short-term as it sends risk assets soaring, but become a major issue over the long-term: "The long-term problem is that the some investor cash (real money cash) that was once going into the Repo market is now going elsewhere", Skyrm explains.
Indeed, the problem is that repo rates are trading in the lower end of the fed funds target range. When GC rates were higher in the range, Repo general collateral, as an investment, was more competitive than other overnight rates. But now that cash has gone to other markets.
In short, just as the market got addicted to QE and the result was a 20% drop in the S&P in late 2018 when markets freaked out about Quantitative Tightening, the Fed's shrinking balance sheet, and declining liquidity, Skyrm cautions that "it will take pain to wean the Repo market off of cheap Fed cash" since "it's a circle" which can be described as follows:For the Fed to end daily RP ops, they need outside cash to come back into the Repo market. For the Repo market to attract cash, Repo rates need to move higher. For rates to move higher, the Fed needs to stop RP ops.
The problem is that stopping RP ops could spark another repo market crisis, especially with $259BN in liquidity pumped currently - more than at year end - via Repo. It also means that the Fed is now unilaterally blowing a market bubble with its repo and "NOT QE" injections, and yet the longer it does so the more impossible it becomes for the Fed to extricate itself from the liquidity pathway without causing a crash.
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... the Fed announced that its latest 2-week term repo operation was also the most oversubscribed since December 16, as $34.3BN in securities ($27.65BN in TSYs, $15.5BN in MBS) were submitted for today's $35 billion operation, as dealers continue to scramble to the Fed for liquidity which they are no longer using for "regulatory" year-end purposes (since it is no longer year-end obviously), but are instead using it to pump markets directly.
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<analysis, charts, rants>
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You’re staring at a massive asset price distortion with indices and individual stocks dancing at an 80’s RSI party, while yields and growth not confirming any of this.
I maintain the Fed has set in motion perhaps the most dangerous and reckless asset bubble since the year 2000. Nobody will believe it until something bad happens.
Will Powell be confronted with any of this next week?
Will he get challenged on the obvious effects his not QE lie has on asset prices?
Will he get challenged on the claim that the Fed does not target asset prices when it in effect does?
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Unfortunately, the Fed made a critical design error in its daily interventions. They are offering to supply repo to the dealers at prevailing market rates. In other words, they are giving the dealers every incentive to take repo from the Fed as opposed to the market. In essence, the Fed has become the lender of first resort when it should be the lender of last resort and offer repo at a penalty rate. The Fed should be willing to help a dealer in need, but it should come at a price.
So, after four months of these Fed repo operations, new problems are emerging. More specifically, the Fed might be going too far and oversupplying this market. The effective federal funds rate is signaling there are enough reserves in the banking system. This month it traded at 1.54%, breaking below the interest on excess reserves (IOER) floor of 1.55% for the first time in 14 months. This is happening as the Fed announces it will continue to plow ahead with Treasury bill purchases and supplying hundreds of billions of dollars of repo supply until April, if not later.
What should the Fed do? It has already telegraphed it will raise the IOER rate by five basis points to 1.60% at the Federal Open Market Committee meeting next week. Presumably, it will also raise the repo offered rate by five basis points to 1.60%. Policy makers should raise the repo rate even higher. Stand ready to offer liquidity, but at a penalty rate.
This won’t fix the problems in the repo market; only rule changes can do that. But at least this will allow the Fed to identify how much supply is needed to get the market back in balance rather than risking a loss of control of the federal funds rate altogether.
...
January 16, 2020
WASHINGTON — The U.S. Department of the Treasury today announced it plans to issue a 20-year nominal coupon bond in the first half of calendar year 2020.
Over the past several years, Treasury has explored a range of potential new debt products, including 20-year, 50-year, and 100-year bonds, as well as floating-rate notes linked to the Secured Overnight Financing Rate—all with the goal of expanding borrowing capacity to finance the federal government at the least cost over time.
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... the Fed also conducted its overnight repo which saw a whopping $64.45BN in liquidity injected...
... and which together with the massively oversubscribed $30BN term repo discussed below, means the Fed has injected $94.45BN in liquidity for today's market needs.
After several relatively uneventful reverse-repos to close off the month of January, which saw a gradual decline in submission, February has started off with a bang.
Even ahead of the results of today's reverse repo, some traders were already closely watching to see how it would play out for one main reason: as we reported on Jan 14, this was the first "tapered" reverse repo, whose aggregate operation limit was shrunk modestly from $35BN to $30BN.
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Two days after dealers unexpectedly flooded the first reduced term-repo (from $35BN previously to $30BN) offered by the Fed, the liquidity shortage in the repo market ... persists, and today the Fed announced that in its latest 2-week term repo (maturing Feb 20), it was $57.25BN in submissions ($35.75BN in TSYs, $21.5BN in MBS) for a maximum $30BN in available reserves.
This means that for the second time in three days, the term repo operation saw a massive oversubscription ...
Today, Vice President Mike Pence and Health and Human Services Secretary Alex Azar announced the addition of the following individuals to the President’s Coronavirus Task Force:
Steven Mnuchin, Secretary of the Treasury
Dr. Jerome Adams, Surgeon General of the United States
Larry Kudlow, Director of the National Economic Council
...
... Dealers submitted a record $108.6BN in overnight repo, resulting in the first oversubscribed overnight repo operation since October (recall the total size of the overnight repo was reduced from $125BN to $100BN).
This means that, if going solely by the amount of securities submitted between the term and overnight repo, the overall liquidity shortage today was nearly $180BN, the highest since the start of the repo crisis, ...
The New York Federal Reserve on Wednesday accepted $100 billion of the $111.478 billion in overnight bids from primary dealers in a repurchase agreement (repo) operation meant to keep the federal funds rate within the target range.
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While the Fed tapered the size of the term-repo operation from $25BN to $20BN as we entered March, the demand for the liquidity it unlocks has not only refused to go down, but has in fact soared, and rose to an all time high of $72.6BN ...
Bloomberg quotes Russian state-run think tank Institute of World Economy and International Relations president Alexander Dynkin as saying, "The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2."
The Federal Reserve Bank of New York said today it will increase the amount of very short-term loans it has been offering to money markets amid a widening market rout.
The Fed had been slowly reducing its lending in a key short-term financing market for repurchase, or repo, agreements, in which the Fed lends cash overnight or for two weeks, accepting government bonds or mortgage-backed securities as collateral.
Today's announcement, however, reflects how growing funding strains resulting from the spreading coronavirus epidemic and increased demand for short-term lending have put any reduction in repo lending on hold for now.
Today's adjustments were designed to ensure that the supply of bank deposits held at the Fed, called reserves, "remains ample and to mitigate the risk of money market pressures that could adversely affect policy implementation," the New York Fed said. "They should help support smooth functioning of funding markets as market participants implement business resiliency plans in response to the coronavirus."
The New York Fed said it would increase to $150 billion from $100 billion the amount of repo lending it conducts on an overnight basis through Thursday, when the Fed is set to update its monthly funding schedule. On two days last week, the Fed saw demand for those overnight repo operations exceed the $100 billion limit, though rates didn't rise significantly. ...
Wonder if Putin expect MbS to go scorched earth. Wonder if Putin wanted MbS to go scorched earth.
The New York Federal Reserve on Wednesday accepted all of $132.38 billion in bids from primary dealers at an overnight repurchase agreement (repo) operation.
It was the largest amount of repo loans since the Fed began the liquidity operations in September.
The New York Fed on Monday increased its daily cash injections to ensure an ample supply of bank reserves. The daily overnight repo operations increased to $150 billion from $100 billion.
The New York Federal Reserve announced for the second time this week that it will substantially increase the amount of liquidity it provides to overnight lending markets, signaling to financial firms that the central bank will do what it can to keep money markets running smoothly amid fears tied to the coronavirus.
The central bank will raise the maximum offering of its daily operations in the market for repurchase agreements, or repo, to $175 billion through mid-April. That is up from the limit of $150 billion announced Monday and above the previous cap of $100 billion.
The Fed also said it will introduce three one-month term repo operations of at least $50 billion each, with the first one being offered on Thursday. That will be in addition to two-week term operations of $45 billion each that will be offered twice a week.
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The New York Federal Reserve on Thursday accepted $50 billion from $82.6 billion in bids from primary dealers at a 25-day repurchase agreement (repo) operation.
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The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released a new monthly schedule of Treasury securities operations and has updated the current monthly schedule of repurchase agreement (repo) operations. Pursuant to instruction from the Chair in consultation with the FOMC, adjustments have been made to these schedules to address temporary disruptions in Treasury financing markets. The Treasury securities operation schedule includes a change in the maturity composition of purchases to support functioning in the market for U.S. Treasury securities. Term repo operations in large size have been added to enhance functioning of secured U.S. dollar funding markets....
- As a part of its $60 billion reserve management purchases for the monthly period beginning March 13, 2020 and continuing through April 13, 2020, the Desk will conduct purchases across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. Specifically, the Desk plans to distribute reserve management purchases across eleven sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes. The distribution of purchases across sectors will be the same distribution as the Desk uses to reinvest principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in Treasury securities. The first such purchases will begin tomorrow, March 13, 2020.
- Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020. Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule. The Desk will continue to offer at least $175 billion in daily overnight repo operations and at least $45 billion in two-week term repo operations twice per week over this period.
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