
Statement Regarding Repurchase Operations - lazerpants
https://www.newyorkfed.org/markets/opolicy/operating_policy_190920
======
dang
Related:
[https://news.ycombinator.com/item?id=21029481](https://news.ycombinator.com/item?id=21029481)

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LocalTrust
Wow this is not good. Repo market is the market of overnight debt between
banks. Banks lend money to each other to cover their collateral
needs/exposures at the end of each day. If banks lose confidence in each
other, they start demanding more collateral from each other in the overnight
market, which means the overnight rate goes up. The NYFed is trying to keep
interest rates down and is having trouble doing it. As a result, it's having
to take some extraordinary measures to the tune of injecting $100b into banks,
every night, for the next month. They are basically trying to ensure that no
bank gets caught with it's shirt off, while the banks are signaling that they
think their peers might be naked.

~~~
spiantino
I don't think that's whats happening. Basically, in a repo you have one party
posting a treasury bond as collateral and being lent the equivalent amount of
cash. There's an interest rate you're charged on the cash, and potentially a
"haircut" on the amount of cash relative to the value of the bond that a bank
might take if they decide the other party is a risk and they want more
collateral posted.

What you're describing is an increase in "haircuts" in these transactions
between banks, but I haven't heard anyone report that has been happening. It
has been, more simply, that too many people are showing up with bonds and want
cash and too few people are showing up with cash and want to lend it. So the
interest rate has risen

~~~
opportune
Why is there such a liquidity crunch though?

And why is the fed stepping in when the liquidity crunch could just correct
itself via market mechanisms - if the market rate for overnight lending was 9%
I assume plenty of organizations would race to take advantage of that

Aside from something that would just naturally correct itself (lenders being
temporarily short on cash due to some statistical anomaly), the only
explanation I can think of is that some of the lenders believe that some of
the creditors are about to default

~~~
nugget
Quarterly taxes seems to have been the initial cover story. My guess is it
ties back partially to the eurodollar carry trade. There is an unprecedented
amount of international rate and currency arbitrage going on which has pulled
US dollars out of the US and could easily manifest unintended macroeconomic
consequences like this. One day repo is easy for the Fed to address but if it
persists then it becomes a confidence issue and people to start wonder: is
this just the tip of the iceberg? If the underlying cause really is a systemic
imbalance of sufficient magnitude, then who knows what else could pop up. It's
more likely to signal major problems in the economies that are importing
dollars (Europe in particular but also Asia) than the US itself, but a
meltdown is bad for everyone; this uncertainty may be what some traders are
starting to hedge against.

~~~
ironSkillet
This is an interesting line of thought, could you expand and simplify your
explanation a bit for people who are not as familiar with the dynamics you're
talking about?

------
ww520
One thing to note is that $100B is created everyday but the $100B is destroyed
the next day. It's not like $100B created everyday for the next month.

~~~
TheAlchemist
That's true. But another way to look at it (not necessarily good), it's like
the water in desert. You are in the middle of the desert and you need water -
you ask a guy - lend me some water please, I will buy you back the same amount
once we are home. Technical speaking, the amount you get and the amount you
give back is the same.

What happened during the last crisis is also a great illustration - many banks
took taxpayers money during the 'dark hours' then paid it back easily some
time later, when the air cleared. Some went as far as to suggest it wasn't
necessary at all. Well, the truth is, the banking system as we know it
survived only thanks to governments stepping in - otherwise _none_ of the
banks we know would exist today. There was 0 trust during the crisis - and all
the banking system is build on trust.

That's why the FED is "taking a sledgehammer to squash a bug". That's also why
it's a very disturbing signal. My gut tells me shit is about to hit the fan.

PS. But don't try to time the market and short it - as the saying goes, the
market can stay irrational longer than you can remain solvent.

~~~
anon1m0us
You don't have to short it, however, would it make sense to start selling
things? Where should money be right now or where should it start going if it
is about to hit the fan?

~~~
cloakandswagger
If there truly is a cash shortage to the point that it is threatening bank
liquidity, the Fed's likely response would be dropping rates and increasing
the money supply with another round of QE.

If that happens, you should be buying, not selling, since QE basically acts as
a subsidy for equities as institutions seek yield with cheap money.

------
CyanLite4
Hoping to clear up some FUD here:

1) This is the financial equivalent of taking a sledgehammer to squash a bug.
Financial markets operate largely on confidence, and especially the rule that
the Fed is the lender of last resort at their specified Fed Funds Rate (now 25
basis points lower as of Wednesday).

2) This isn’t $165b. It could be the same $75b used every day.

3) No, this isn’t a sign of a healthy market, but bond prices especially in
Europe have gone bananas the past few months and we could be in the biggest
bond bubble of our generation. This was evident in negative yields as also a
very quick yield curve inversion in the U.S. for 2y10s.

4) I personally believe some banks were over levered as bond prices began to
unwind this week and got caught with their pants down.

5) I think the Fed is using this sledgehammer approach to allow some banks to
unwind and de-lever their bond positions safely and orderly over the next 2
weeks.

6) I said #5 about 11 years ago, but I believe “this time it’s different.”

~~~
helen___keller
> 2) This isn’t $165b. It could be the same $75b used every day.

I made the $165b comment, my understanding is that there's four overlapping
liquidity injections (three 14-day operations and the recurring overnight
operation). Would this not be 30 + 30 + 30 + 75?

------
SilasX
To retry my earlier comment[1]:

The Fed is nobly ensuring banks' 2.25% APR ("target federal funds") rate
against being viciously squeezed to 9%.

Over three weeks.

That means banks are, at most, saved from having to pay an (extra) interest
charge of $3.6 million per 1 billion (revolving) dollars borrowed. [2]

That ... still seems like a rounding error against their typical quarterly
profits, considering it's a one-time anomalous event.

Is that really something that justifies extreme Fed measures?

[1]
[https://news.ycombinator.com/item?id=21000023](https://news.ycombinator.com/item?id=21000023)

[2] computed from 1,000,000,000(1.09^(3/52) - 1.025^(3/52))

~~~
toomuchtodo
It’s to prevent a cascading failure due to a rapid loss in confidence
requiring even greater action from the Fed (such would occur if interbank
lending dries up because of counterparty risk [perceived or actual]).

Disclaimer: I work in financial services, but am not involved in these
operations.

~~~
SilasX
So, banks don't trust each other's collateral, but the Fed does, and that
judgment is more correct?

~~~
JumpCrisscross
> _banks don 't trust each other's collateral, but the Fed does, and that
> judgment is more correct?_

The collateral is Treasuries. Nothing exotic.

~~~
SilasX
Then why are banks not trusting that as collateral?

~~~
whatok
I don't think banks not trusting Treasuries as collateral has ever been raised
this week. Banks simply do not have the liquidity to finance transactions in
the repo market right now.

------
helen___keller
Additionally, three overlapping 14-day term operations of atleast $30 billion
each.

Adding it together we can see the fed is going to be providing a minimum of
$165B in total liquidity to the market while all the operations are
undergoing.

Curious how this will play out in the long term. Are we going to add even more
liquidity when these operations end?

~~~
deevolution
I wish the fed would print some money for me to help pay my student debt

~~~
germinalphrase
There are presidential candidates essentially promising just that.

------
ipython
I wish I understood what this meant. From my primitive understanding, we have
too much money concentrated in too few people trying to make unrealistic
returns, so they hold on to it rather than invest it.

Does this move mean that the fed is trying to keep its benchmark rate too low
and absent market forces it would be much higher?

~~~
yasp
From what I've been able to gather, there has been a decrease in demand for US
Treasurys from certain segments of the market. This has resulted in primary
dealers having to purchase the difference. They don't purchase USTs from cash
on hand. Instead, they use the repo market to fund the purchase. However, the
supply of repo market funds is relatively inelastic. Thus, you have a big
spike in repo demand with a relatively fixed supply. This was causing the rate
spikes we saw. Thus the Fed stepping in as lender of the last resort.

~~~
not2b
It seems to me that the issue is that there has been an increase in supply,
because of the massive deficit. This means that there are more US Treasuries
for sale than there are buyers. They could sell more by letting the interest
rate rise, but that would have major negative effects if a large increase is
required.

~~~
yasp
The increased supply of UST is another contributing factor, yes. Important
point AFAICT is the supply inelasticity of repo funds.

------
motohagiography
What is the asset banks are so worried their counterparties have on their
balance sheets that they need a Fed repo operation?

Couldn't be stuff like a $500m personal loan to a startup CEO, secured by said
CEOs stock in a private company that has negative cash flow and no real
assets, which he also happens to control? Surely there is no reason to doubt
the quality of collateral like that.

But more seriously, legit question is what do the banks know about each other
that the financial press hasn't reported yet?

Personally I think the Fed is keeping interest rates down to defuse a massive
geopolitical conflict that is closer to blowing than anyone realizes, but that
doesn't explain why banks are worried about getting stiffed by each other.

~~~
o-__-o
>Couldn't be stuff like a $500m personal loan to a startup CEO, secured by
said CEOs stock in a private company that has negative cash flow and no real
assets, which he also happens to control? Surely there is no reason to doubt
the quality of collateral like that.

As a startup CEO with available stock, an actual positive cash flow and no
_real_ assets.. please tell me where I can apply for this type of loan?
Because all the loans I'm looking at are 3-8% interest and requires me to sign
over my personal assets as collateral in return for a paltry $250k. I'd rather
use that loan to just buy more real assets for myself instead (which is what I
am doing)

~~~
azernik
This is a reference to Elon Musk's financial strategy, specifically
[https://www.reuters.com/article/us-tesla-offering-
banks/elon...](https://www.reuters.com/article/us-tesla-offering-banks/elon-
musk-owes-507-million-to-banks-helping-tesla-raise-capital-idUSKCN1S901E)

Essentially, he has almost nothing in cash, and instead of selling stock to
raise cash he borrows money with his stock as collateral. This is why he's so
monomaniacally focused on his stock value and public image.

For a more professional, but login-walled, overview, see
[https://www.economist.com/business/2016/10/22/countdown](https://www.economist.com/business/2016/10/22/countdown)

~~~
o-__-o
This isn’t just Elon, Oracles Founder did the same thing. Except they actually
have a company with assets. So I don’t get what OP was rambling on about “non
real assets”. A fucking manufacturing plant is an asset. My servers are not.
Looks like the financial world is working as it should...

~~~
azernik
The specific $500M number was a reference to Elon, but yeah, given how
successful this strategy is I'm not surprised the Oracle founder uses it too.

I agree with you that these cases are where the companies have tangible,
provable value, even if they're not profitable right now.

------
beezle
Bloomberg only gives a few free stories out so choose wisely:

[https://www.bloomberg.com/quicktake/the-repo-
market](https://www.bloomberg.com/quicktake/the-repo-market)

[https://www.bloomberg.com/news/articles/2019-09-18/powell-
se...](https://www.bloomberg.com/news/articles/2019-09-18/powell-seeks-to-
regain-control-over-fed-funds-with-ioer-tweak)

[https://www.bloomberg.com/news/articles/2019-09-18/overnight...](https://www.bloomberg.com/news/articles/2019-09-18/overnight-
u-s-funding-rate-at-2-8-elevated-for-a-third-day)

[https://www.bloomberg.com/news/articles/2019-09-16/repo-
mark...](https://www.bloomberg.com/news/articles/2019-09-16/repo-market-chaos-
drives-overnight-rate-up-by-most-in-months)

------
Rury
To me it sounds like there is glut in treasuries due to the huge government
deficit and there are not enough buyers. This event is the banks not having
enough on hand on hand for the treasuries and the corporate tax event at once,
so the fed is stepping in to provide temporary liquidity.

Is it possible, or are we close to to where the banks (or other buyers) won't
be able absorb the glut in treasuries themselves, and the fed has to buy them,
effectively monetizing our deficits?

------
aazaa
Zooming out, here are some points I've been considering:

1\. A repo intervention on this scale hasn't happened since the 2008 crisis.

2\. Experts seem divided on what's causing the extremely tight overnight
liquidity phenomenon.

3\. The Fed refused to budge from its tepid stance on long-term rates and
restarting QE in its recent meeting. This stands against a backdrop of a
stagnating world economy, the collapse of foreign sovereign bond yields, and
unprecedented browbeating from the White House.

~~~
JumpCrisscross
> _Experts seem divided on what 's causing the extremely tight overnight
> liquidity phenomenon_

Divided on root cause, but not on its seriousness. Quarterly tax payments on
the same day as a massive Treasury issuance amidst a Eurodollar carry trade
that yields more, for longer, than the overnight markets. Nothing related to
the soundness of the financial system.

------
howeyc
In order for the overnight rate to be within the Fed target range shouldn't
the Fed be involved in the market every day anyway?

------
csense
So if banks are super desperate for Fed funds, but actually have Treasuries to
put up as collateral to borrow those funds in the overnight market, why don't
they just sell their Treasuries instead, or let them mature, and hold more
cash?

Hasn't the Fed for years now been literally paying the banks to do just that
with IOER?

------
h2odragon
NFI what any of it means myself, but it does seem sensible that upcoming
Brexit and middle eastern news has a lot of large funds moving around, which
might be sufficient reason for extra liquidity to be needed?

------
jjuhl
Smoke and mirrors and games...

~~~
bonestamp2
Hey, it's all fun until 14 million people lose their homes again right? /s

~~~
jjuhl
My point was purely that this is the financial market playing their usual
games again.

~~~
bonestamp2
I hear you, and my point was that sometimes those games go sideways in a big
way.

------
FigmentEngine
fed$ git push repo

------
RandomGenerated
We've come a long way from stress tests I see

------
MarkPNeyer
This is great for bitcoin.

------
Bostonian
My understanding is that repo trades are 1-day loans collateralized by
government bonds. So I don't see how the government is taking any risk here or
why it is problematic.

------
situational87
Could you even imagine what we could do with $100B every day?

My god. They just sit down at the keyboard and print money out of thin air and
electrons and give it to any of the 20 biggest banks who ask for it.

We could literally solve every single problem.

~~~
atemerev
Banks are there to give capital to businesses, which do solve every single
problem from the beginning of capitalism. This is how it works.

~~~
Moral_
More like 95% of that is going to go into funding/offsetting some obscure
financial derivative that 8 Mathematics and Finance PhDs in a room cooked up.

