> A sudden surge in the overnight rate on Treasury repurchase agreements that began on Monday continued Tuesday -- with the rate opening at 7%, according to ICAP. …
> What happened was an unfortunate coincidence -- just as companies were withdrawing cash from money markets to pay corporate tax, a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week.
> With just $24 billion of bonds maturing in the period, this became one of three occasions this year when the imbalance between debt redemption and cash needed to buy new Treasuries exceeded $50 billion.
Again, if those paragraphs don't obviously relate to the overnight lending market, read his column for context.
But this isn't slowing down any time soon, so the problem will keep recurring. Deficit's are rising, and foreign purchases of treasury debt has plateaued the past few years.
This, some say, is the real problem: banks are forced to purchase this debt and so the funding needs of the US government are crowding out domestic banking sector. If continues, this means the Fed will effectively be monetizing US deficits.
Luke Gromen has covered this in various podcast interviews and on twitter: @LukeGromen.
You seem informed, and I want to be upset by this, but...
What does "monetizing US deficits" mean here?
This is why rent can raise 10% in one year -- the largest expense for nearly everyone -- and you can have 1% inflation. Most people aren't renters. So they aren't paying more for their rent. In fact, when bond prices go down (from this manipulation), mortgages get cheaper, so most people are paying LESS for the same house / mortgage.
Equities go through the roof.
If you're a laborer / renter, this is like a double gut punch. If you're a capitalist aristocrat, it's like a double gift horse.
And, as far as inflation goes, at least the way the Fed measures it -- it doesn't have a huge effect.
Commodities are so globalized now, and the US isn't 50% of the global economy anymore -- more like 20%. So strong upward pressure on commodities here, doesn't have a huge impact on commodities prices.
Though that was from experience from times where there wasn’t this imbalance between supply and demand between blue collar (excess) and white collar (shortage).
Like a lot of financial analysis I read, you seem to look at only one side of the transaction. For every renter, there's a rentee. For every buyer, a seller. For every borrower, a lender. Those people are abundant as well, and the exact opposite comment could be written about them.
> Most people aren't renters
Source? Most of my friends (outside of the tech echo chambers) are worried they'll never become buyers because of student loans, decades of wage stagnation, skyrocketing rent, real estate, college tuition, etc..
Aug 12, 2019: "U.S. consumer inflation outlook declined as Fed weighed rate cuts .... The Fed’s preferred inflation gauge, known as the core personal consumption expenditures price index, gained at an annualized 1.6% pace in June."
how do you actually sell debt
Like can one sell their own debt?
It's not really a dumb question. I get why people might look at their debt as something they own, given the debt itself is tied to their identity and credit score until paid off.
"IOU so much money"
and then you take money from anyone who's willing to give you money in exchange for that paper.
Debt = that paper
Selling = basically getting money for that paper
If the bond sells for more than its nominal value, then the effective interest rate you pay to borrow will be lower than the nominal interest rate, and if the bond sells for less, then your effective interest rate will be higher than the nominal interest rate.
The face value of the bond is what you will receive at maturity. When the bond trades in the intermediate term, its price is determined by prevailing and expected interest rates.
Seems like a recipe for WWIII.
The immediate effect of the fed doing that isn't catastrophic, it's just devaluing the US Dollar, or put in another way, inflation.
Inflation at a certain level is thought of as a good thing, the fed and economists have inflation targets where they don't want it to be too high or too low. One of the thing that moderates inflation is how the fed creates money and lends it out.
The recipe for WWIII is runaway inflation where in order to keep things together, a central bank issues money at an exponentially increasing rate with a very small doubling period and the currency becomes worthless in trade with other currencies and to purchase goods.
The US is very far away from that. The increase in the deficit and debt is problematic and significant, but not anywhere near catastrophic.
Many governments/central banks are trying to exit the $ and UST's and are buying gold instead of treasuries.
Ultimately, the US has quite a large amount of liabilities, and entitlement spending on retiring boomers coming due in the next few years. Currently, at the peak of the economic cycle, we are running $trillion deficits.
Imagine what happens if there is a recession? Even if there isn't, these fiscal deficits, along with our large trade deficit mean:
The rest of the world gives us real goods, we give them paper IOU's. The debt is not shrinking but is growing, and faster.
So, they are not tolerating it. Problem is, in the petrodollar system, the reason this whole ponzi could occur is dollars were needed to buy oil. Post-71 Nixon shock, the $ was as good as oil. Saudi and others only sold oil for dollars putting a floor on the value of dollar and incentivizing both oil exporters and rest of world to want to hold dollars, thus recycling their surpluses into treasury debt to both fund their export economies and fund our consumption.
This CANNOT continue because by definition it means rest of world works and produces for never ending, and ever growing, US consumption. Holding dollars, amidst a growing realization the Fed would have to monetize this debt and government would never pay it back in "real terms" has led many oil exporters to try to sell oil in other currencies, and countries generally to try to exit the dollar for trade.
Iraq, Libya, Iran, Russia, and Venezuela. Do we see a pattern of what happens to nations that try to do this?
They either get regime-changed or become enemy number one for US government. Do you think it is a coincidence that Venezuela has the largest oil reserves in the world and just happens to be the next country US is involved in pushing regime change (them or Iran)?
To read about this system of petrodollar recycling, and how/when it was created in the early 70's because of collapse of Bretton Woods, check out an this excerpt from excellent book "The Global Minotaur: America, Europe and the Future of the Global Economy" by Yanis Varoufakas former Greek minister of finance.
Good thread  covering a broad summary of trade, the dollar, and petrodollar warfare 
This is a frequently overblown fact. 12.4% of the population was >65 in 2000, increasing to 15.2% in 2006. So this huge incremental wave of retiring boomers is... 3% of the population.
> The rest of the world gives us real goods, we give them paper IOU's.
This is fun to say but try paying for goods with a paper IOU. Chances are the store will prefer dollars, even though they're technically the same concept.
> Problem is, in the petrodollar system, the reason this whole ponzi could occur is dollars were needed to buy oil. Post-71 Nixon shock, the $ was as good as oil. Saudi and others only sold oil for dollars putting a floor on the value of dollar and incentivizing both oil exporters and rest of world to want to hold dollars, thus recycling their surpluses into treasury debt to both fund their export economies and fund our consumption.
People want dollars for various reasons. The dollar is stable relative to other currencies. They're harder for authoritarian governments to seize. There's inertia (It's already the reserve currency and working fine, so why change?). It's extremely liquid. All more valid reasons than this random oil conspiracy theory.
> This CANNOT continue because by definition it means rest of world works and produces for never ending, and ever growing, US consumption.
Not sure how this follows, at all.
> Holding dollars, amidst a growing realization the Fed would have to monetize this debt and government would never pay it back in "real terms" has led many oil exporters to try to sell oil in other currencies, and countries generally to try to exit the dollar for trade.
Nobody is exiting the dollar for trade. What're you gonna do, switch to euros? yuan?
HN and wacky economic conspiracy theories, name a more iconic duo.
There has not been a mass exodus to the yuan, quite the opposite China has been manipulating it up through that entire time.
Euro denominated oil is likely to come online in the next year or 2. The E.U. started a benchmark program this summer. Roseneft (a big Russian producer) switched to Euros a couple of weeks ago.
We aren’t going to go to war with China, Russia or the Euro zone for switching off petrodollars. The opposite conclusion is ludicrous.
To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ripple throughout the financial system.
Why do banks need special assistance in that situation? If you depend on your input prices not going up by that much for a short period, you're hosed anyway...
 1.09^(1/365) - 1 vs 1.01^(1/365) - 1
As a rates trader, your positions are denominated in the millions of dollars. Some back of the envelope math:
1mm of 10y treasuries (repo'd at EOD) is roughly $1k of risk (dv01 -- if rates move by 1bp, your pnl fluctuates by $1k). To finance that position, you're paying $236 at 9% vs $27 at 1%.
Now say you've got 1mm of 2y treasuries. That's roughly $0.2k dv01. Unless 2y rates move 1.25bp overnight, you're losing money just financing the position.
In short, there's a massive difference between paying 2.3bps and paying 0.27bps.
No, think of it as paying $236,000 for something that normally costs $27,000.
You can think of this business as providing banking services to large corporations, who aren't able to simply put money in a savings account at their local credit union.
It's doesn't collapse in the short run, but it can harm the ability of these corporations to access their funds. Short term financing disruptions can have major impacts across all markets.
Show me a business where a sudden 10x increase in costs isn't painful...
While dealing with assets in the billions and lending out at higher interest all the time.
>Show me a business where a sudden 10x increase in costs isn't painful...
All the ones where one input went up 10x temporarily and survived, or just the most characteristic examples?
Yes, those costs were computed on a book long 1 billion dollars of notional. There's a difference between notional and risk though. 1 billion dollars of 10y treasuries will be ~1mm dv01. Both matter.
> lending out at higher interest all the time
This isn't how rates trading works. Entering positions costs money. You're not making loans. If you hold treasuries, you're earning the coupon on them for the period that you own them. It gets more complicated when you factor in repo, but typically you pay GC repo when you're long.
This article is about repurchase agreements (repos). They are a form of collateralized loan used in rates trading. If you need to borrow money for a short period, you can do so in the repo market. You sell treasuries to a counterparty, agreeing to buy them back at a later date. You agree to pay an interest rate called a repo rate for this transaction. This is the rate the article is discussing.
Someone borrowing through the repo market is doing it to satisfy liquidity needs. They need the liquidity for some ongoing concern or investment or trade, or something (I don't know the details or relevant term, but it doesn't matter for the point).
That venture has some ROI. The temporarily higher repo rates have to be compared to that. That venture's costs are temporarily going from .002 percent to .02 percent of capital invested. Either way, a small portion. I don't see the emergency beyond "I wish this made the higher profit I am accustomed to".
The difference between rates markets and, say, equities markets is that you think of your risk in basis points and not percentage points. A 10bp change in equities prices on a $1 billion book will cause $1mm change in pnl. However the $1mm dv01 treasury book (with notional $1 billion) will make or lose $10mm with a 10bp change in interest rates. You can see why basis point moves can be much more meaningful in the rates space.
Let's consider market makers now. They are mandated to make money by provisioning liquidity, not by taking views. This means that their return is supposed to come from earning spread and not from being positioned the right way on market moves. This often requires holding and financing hedged positions overnight. If your financing costs are >2bp, there's a pretty solid chance you're going to lose money on the positions you're holding, considering that you hedged them specifically to try to minimize fluctuations. It's not just a matter of making less profit as much as it is one of losing money entirely. Were such increases in financing costs to become prolonged or more frequent, there would be a deleterious effect on rates markets in general.
The answer for finance is just the same as for computer science, you are doing things many times with big volumes, so tiny differences ass up.
Am I reading this wrong? Is this a bad analogy? Is it not exemplary of how creditworthiness seems to rise at a higher rate than the means used to justify that creditworthiness? I'm a layman, but I'd like to know more.
If you are rolling short term debt and only have long term assets you can't sell, you are taking a liquidity risk. You may be perfectly solvent (have more assets than liabilities) but if you cannot refinance the debt one day, you will go bust.
The Federal reserve is not in the business of injecting capital into insolvent banks (which is why TARP in 2008 was a very unusual and controversial measure), it is in the business of providing a backstop of liquidity to banks that are solvent (this is enforced through capital requirement) but may require liquidity on a short term basis.
It just seems like real cash and assets are valued less than financial instruments? Because they're More Future Money That We Expect To Exist compared to Less Now Money Which Actually Exists? I guess that makes sense but is also absolutely insane?
Again, correct me if I'm wrong.
The challenge with real assets is they are hard to value, and hard to sell quickly. Therefore the interest and fees charged are higher (also people prone to need short term loans using their car as collateral are also very prone to not pay these loans back).
These financial assets can be calculated, sold, more purchased, etc. in known quantities very close to instantly. Standardized financial assets are very easy to move or use in large quantities for these reasons. A 5 yr US Gov't bond is a known quantity.
Which, arguably, should be a thing, so long as it's elevated in priority to the level of a debt to the IRS (i.e. can put liens on anything you own and garnish wages).
Similarly, if the Fed loans to these banks at a penalty rate -- presumably much more that regular risk-free loans like in e.g. securities a money market fund -- I wish the Fed would let people sign up for these programs so our idle cash could get lent out at that rate.
And that's pretty much what banks do with the Fed. They have assets that they get funding for from the Fed with a short term repo transaction. In theory the Fed takes very little risk on the transaction.
The thing about financial instruments is that they scale infinitely better than "real assets".
It's like seeing Amazon, Google etc. spend so much on cloud computing, and then asking if real computers are valued less than virtual ones.
For assets whose ownership is more nebulous than an automobile you typically have to temporarily relinquish ownership of it to use it to secure a temporary loan, ie, pawn it.
This is what a loan is. Look at the assets and revenue someone has and give them money if you think they can pay it back. You could reconstitute that situation as thinking of it as selling the equity in your assets and future profits and then buying it back in installments.
Companies try as hard as they can to minimize the amount of money just sitting around and not doing anything. They accomplish this with frequent short term loans that smooth out the noise in their cashflow.
The building doesn't appreciate, if you spend $5000 on home improvements or repairs almost invariably an honest agent will tell you the value of the building was only marginally increased by doing this, because it was never the building value that mattered.
Where people just own the building and NOT the land, "mobile homes" or "manufactured homes" depreciation destroys the value of the home relatively quickly, within a lifetime usually.
There is also another reason. In most jurisdictions a mortgage is a super senior claim. It is senior even to the taxman, which is very rarely the case for private debt.
1) Imagine you own 10 houses outright. Congratulations, you're worth $5 million dollars! You want to spend some of that on a boat, but it's not liquid fungible money, so you can't, not without some intermediary steps that inject liquidity into your situation. You're basically solvent, no bank owns a claim on you.
2) Now, imagine you "own" 10 houses, only they each have a $500,000 mortgage. You are worth negative $5 million. But it's okay! You rent them out, and generate enough revenue to pay the mortgages. Again, you're solvent.
3) Repeat #2, only without the rent revenue. You're insolvent.
This doesn't mean insolvency & illiquidity can't coexist, but one is not an extreme form, nor does it necessitate, the other. You can be insolvent but very liquid. You can be illiquid but solvent. You can be insolvent and illiquid (which is basically #3 above)
My point was that, when the illiquidity is sufficiently advanced -- when you the actual ability to sell is far enough into the future, and the possibility of making a sale is increasingly dubious -- then those judgments of how much it's "worth" become likewise dubious, and the venture is more reasonably characterized as insolvent, because the unwillingness of others to buy means the property doesn't have a value that supports its status as sufficient collateral.
Also, in your example, assuming (which was the thing I was conditionally disputing) that the real estate really is worth the $5 million, you'd be worth $0, not negative $5 million.
Only one bank has failed in the US in the last two years.
The real risks are systematic (many banks failing), not that an individual bank will fail.
But yes, it’s far easier to get funded as a bank than an individual, mostly because there are laws, institutions, and processes to try and remedy problem banks if trouble happens and individuals are really on their own to find advice and resources.
EDIT: I was wrong, according to FDIC it was 157.
That's not really that comforting, especially when there were 8 failures in 2017. 2018 was the first time since 2006 that there wasn't a bank failure and multiple bank failures. 2006 was also the last time we had consecutive years without a bank failure.
From a quick search: apparently in 2017, there were 767,721 non-business bankruptcies in the US. That's about 0.236% of the population.
And that year, there were 4,909 banks. 8 failures would represent 0.163% of them.
So it looks like individuals were a bit more likely to go bust than banks in 2017, but those figures aren't really all that different.
(I haven't checked exactly what these figures mean, or how authoritative they are. Just wanted a ballpark idea...)
OK, we probably should exclude children from the calculation of the individual bankruptcy rate, which would make it look rather worse. Still, the difference between individuals and banks isn't as dramatic as I'd have expected.
Think of it as lubrication for a system that is a bit squeaky in some places.
You should be asking what the steady state looks like.
The Federal Reserve implements its mandate to control interest rates and inflation by managing the money supply. Specifically, they do that by creating and destroying money by buying and selling government bonds on the market, until the price of those bonds is such that the interest from holding them falls within the target interest rate range.
When certain interest rates were, for a moment, excessively high, they took a modestly extraordinary step to intervene. That's all.
Bank bailouts were a bad idea that increased moral hazard and left the economy more at risk than it was before, but this isn't a bailout, and the commentary is about as topical here as a generic Microsoft rant on a random HN article about compilers.
Its not that "no one cares" about "a little guy", it's that even though I didn't eat lunch today, my colleagues did. If me skipping lunch meant my colleagues didn't have any food, someone would step in to avoid my colleagues dying
It's hard to make analogies between household finance and corporate/national finance. Modern finance is a huge and complex topic. If you haven't and are interested, start with some basic economics, then move on to more focused topics.
This is then multiplied when those people are those who actually do the work. Rich people in retirement homes can't get their stocks and 401ks or whatever to wipe their asses.
one other thing though, that i think about a lot is:
why do we even have a system that needs so many bailouts and adjustments and hacks to keep it going... seems like our “economic os” is lacking “memory protection”...
Which is horrifying because it means it’s being driven by total ignorance.
>why do we even have a system that needs so many bailouts
Overnight lending is not a bailout, ffs. You can do the same thing as an individual with a credit card, a payday loan, etc.
Basically, the Fed issued a bunch of promises of positive growth in order to get businesses or people with money (cash) to dump that money into the banks to increase liquidity if I'm understanding this right.
The financial market actually only gets into trouble when money (capital reserves) get low in comparison to balances/liabilities. "Money now" being in the right places is more important in keeping things going smoothly than "Money Later" being dumped into the market.
"Money Now" shortages cause bank runs. "Money Later" (Treasury Bonds) excesses tend to attract "Money Now" when people want somewhere safe to plop "Money Now" to get back "Money Later". The extra "Money Now" allows interest rates on lending to drop.
As I understand it, low "Money Now" supplies are responded to by lending at increased rates, because the bank in question can't just issue loans without the capital to service them.
Or something like that.
Shit, I don't even know if I managed to help. I just spent a week pouring over economics stuff to try to make sense of it all, and I'm still not sure I'm grokking it.
i think that says more about your relationship with your friends than it does the banking system.
Stock buybacks are the same thing financially as a corporation issuing dividends except that with a buyback, the holder isn't forced to take a taxable event. It's almost always better for the owners to receive buybacks rather than dividends, especially if the owners pay income taxes.
Returning money to shareholders is much better than pissing it away on whimsical experiments because the market is a better investor than some exec board at a company sitting on cash.
But birth rates are low, so demand is going to be depressed for many decades to come. So we will need something, either fiscal stimulus or QE.
By the way, when I say birth rates are low, I'm very much including China. The one child policy has global effects. World wide interest rates would be wildly higher if Chinese families had continued to have 4 to 5 children, which is that they were having right before the imposition of the one child policy. It's because China has so few children that they have so much savings, leading to the global savings glut that has given us interest rates near 0%.
So much different outcome for US with large trade deficit and ever growing fiscal deficits. Some argue if we did go the route of Fed monetizing (which almost certainly has to happen) the $ will be value much lower than it is today. This would help to close the trade deficit though, and repatriate some lost industrial capacity, boosting exports.
Best laid plans and all that, but there's no point worrying about a theoretical boogie man.
This is a pretty technical subject with a lot of moving parts so it's hard to really have a full understanding of things. This is not a one-off event and can easily happen in the future under similar or different circumstances unless the Fed makes some changes (that they've been seen behind the curve on). This is easily dismissed right now but this happened under relatively calm market conditions. When stuff like this happens under more volatile markets stuff breaks really quickly.
In my home country the central bank rate is enforced by providing central bank deposits and central bank loans, available in unlimited quantity for commercial banks. When the market gets cash congested (like here) banks just start tapping the infinite central bank credit line, at central bank rate. Similarly if the market gets flush with cash banks just deposit it at the central bank. Ergo the market interbank lending rate is always between the central bank deposit and credit rates.
The fact that it doesn't normally happen is like when most purchased options are not exercised but sold back. Yeah, sure, but if there was no possibility of exercising them then options would have no value. So it has to be there, then we can safely almost never use it.
Traditionally, Fed used open market operations to target the fed funds rate. This entailed either buying/selling treasuries or conducting repo operations (as was done here). This was a corridor system, as banks could earn no less than 0% interest keeping reserves on the Fed's balance sheet (no negative interest) and could finance at a cost no higher than the discount rate in which banks borrowed directly from the Fed's discount window (this, however, sent a very negative signal to the market).
For the past decade, the Fed has relied on interest on excess reserves (IOER) to target the fed funds rate, a policy known as a floor system. Here, banks earn a given interest rate on reserves kept on the fed's balance sheet. The floor system theoretically ensures short term rates do not drop below the IOER rate (although it is not always the case). This does not entail engaging in open market operations.
> Why else would anyone even care about what the FED rate is?
All dollar interest rates are impacted in one way or another by the fed funds rate. The strength of the dollar is also impacted by the fed funds rate, as it may become more or less attractive to keep balances in the US. The floor system currently employed makes it less attractive for banks to use excess reserves to make loans, as the risk free rate (on the fed balance sheet) is greater. This diminishes the money multiplier effect that banks have.
Additionally, some foreign institutions are able to keep money on the fed's balance sheet, helping them avoid negative interest rates. Again, this disincentivizes them from making loans and also undermines monetary policy implemented by their local central banks. Finally, some currencies have a USD peg (e.g. HKD). These pegs effectively import Federal Reserve monetary policy (to help mitigate the risk of currency crises) which affects the local economies.
Also this is what Wikipedia says on the topic:
> The (effective) federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies' securities).
So, WAI. We just haven't seen cash injection through this mechanism in a while.
That's right. Open market operations were traditionally used to target the fed funds rate. The discount window does serve as the upper bound though in extreme cases. Typically, reserves would be loaned overnight between banks on the fed funds market. This market has been decimated by the floor system.
> IOER, by design, provides just a floor.
In theory, yes. It has also acted as a ceiling. Not all institutions with access to Fed's balance sheet are able to receive IOER (e.g. GSE's). These entities loan the money to banks overnight at a rate below IOER. The banks then earn IOER on that money. This arbitrage can lead to an effective fed funds rate below IOER.
You mean there has been so much cash around that nobody really needed to get cash via the fed funds market, for quite a while? It does seem like the spread between fed funds and IOER is generally just a few bp, maybe even 1bp sometimes, which I guess is where the "ceiling" you were talking about comes from:
Prior to IOER, banks needed to lend money on the fed funds market to earn interest on any excess reserves. Doing so exposed them to the credit risk of their counterparty. Once it became possible to earn IOER risk free, banks had no incentive to expose themselves to the credit risk. Since banks (of all sizes) could not then rely on being able to access the fed funds market for liquidity, it became necessary for them to keep more reserves at the Fed. Perversely, as the quantity of reserves held at the Fed increased, interbank lending decreased (for more detail, see  pages 33-39).
> It does seem like the spread between fed funds and IOER is generally just a few bp
Until recently, it looks like the spread has been roughly 5-17bps . For a floor system, it seems rather odd that this would exist at all, especially for a period of a decade (see  pages 18-19).
Thank you for many details, you've greatly increased my (and hopefully other people's too) knowledge of the United States money markets.
That's consistent with the recent shift from a tightening (rising rates) environment to a softening environment. I agree it's not particularly newsworthy.
Frightening... if true. I hope Matt Levine's explanation (cited by mrosett) is the correct one.
But also, if short-term rates are spiking (even if it's a rather different type of shrt-term rate), does that mean that the Fed was incorrect to drop the rate at its last meeting?
What happened is nothing to do with the level of rates. It is to do with the volume (and often the location) of liquidity (location because tax payments just go on deposit somewhere else, but it still causes a dislocation).
Maybe it's time for the system to admit this, it can't be worse than universal health care.
> "There is not enough cash in the banking system for the banks to meet all of their liquidity and regulatory needs. I'm not that worried, because the Fed will fix it."
I for one am deeply worried, because this pretty much looks and quacks like a liquidity crisis, so it might as well be a liquidity crisis, I've last had this feeling in October 2008. At least that's what "not enough cash" means to a layperson like myself.
Yeah, the Federal Reserve has a “magical money tree”: the whole reason they exist is to manage the money supply.
That's a lot like saying the whole reason google exists is to help people find information. There are greedier reasons for these organizations to exist.
No it's not.
> There are greedier reasons for these organizations to exist.
Any “greedier reason” for the Fed is a particular application of managing the money supply; it to exists to manage the money supply, independently of whether it exists to do that for the public interest or “greedier reasons”.
I'm not suggesting it would be an end of days scenario, just curious.
I still don’t know why the ordinary payments system has to be coupled with hedge funds and derivatives and whatnot. It should be completely separate. It’s like having your car explode because a cup holder got a crack.
Also do consider that most contracts include grace periods for technical glitches.
But the first line of defense is the enormous amount of cash and liquid assets banks are required to hold to ensure they remain liquid.
I know it's probably well known but i am looking for a modern version of the old coloured liquids in tubes
It was my (perhaps mistaken?) understanding that the Fed operates an overnight repo facility regularly - like, every night. It reads like CNN is reporting this like an exceptional emergency maneuver. Is the newsworthiness in fact just the size of the liquidity injection, and CNN is a little confused about what the ON repo does? Or am I mistaken about the Fed making overnight repo agreements regularly?
The Fed has been surprisingly consistent in its reduction of QE . There is no way QE will be drained by the next recession but what is interesting is that they keep draining even though they are considering lowering rates. I am surprised it doesn't have a bigger impact on the market given how large of an impact QE had on the way up.
This is the answer. Money printed out of thin air to buy bonds.
Bye bye affordability if this continues.
This is the best technical write-up. Most mainstream financial reporting will focus on explaining repo so hard to get into the details, and the truth is that 95%+ of those who work in financial services have no idea what the repo market is.