A six year retrospective on a very strange day.
The explanations proffered over the years do not satisfy.
As
one example, the corporate tax payments due on the 16th of September
were in the rear-view mirror on the 17th, the day of the spike, a fact
pointed out by the authors of the Treasury's Office of Financial
Research retrospective. There are other anomalies that we will look at
over the coming days.
From the OFR Blog, April 25, 2023:
OFR Identifies Factors That May Have Contributed to the 2019 Spike in Repo Rates
Views and opinions expressed are those of the authors and do not
necessarily represent official positions or policy of the OFR or
Treasury.
A convergence of events caused a 2019 spike in repo rates, according to a new OFR Working Paper.
On Sept. 17, 2019, intraday repo rates rose to more than 300 basis
points above the upper end of the federal funds target range. This was
30 times larger than the same spread during the preceding week. In “Anatomy of the Repo Rate Spikes in September 2019,”
the authors explain that the spike resulted in large part from a
confluence of fundamental factors—large Treasury issuances, corporate
tax deadlines, and an overall lower level of reserves—that, when taken
individually, would not have been nearly as disruptive. In addition to
these fundamental factors, the authors provide new evidence highlighting
the role that limited transparency and market segmentation played in
exacerbating the spike.
What Happened in Repo Markets?
Stresses
in the U.S. repurchase (repo) markets, while uncommon, can occur
unexpectedly. In mid-September 2019, repo rates spiked dramatically,
rising to as high as 10% intraday. The disruption began on September
16—the day of Treasury settlement, which coincided with corporate tax
deadlines. The combination of these two developments resulted in a large
transfer of reserves from the financial market to the government, which
created a mismatch in the demand for and the supply of repo that drove
rates higher. However, even with this transfer in reserves, it is not
immediately clear why repo rates rose as much as they did, especially
since the peak of the stress occurred on September 17, after the
Treasury settlement and corporate tax deadlines had already taken place.To aid in understanding the source of stress,
Figure 1 below sheds light on the intraday pattern of rates among
different segments of the market, using unique data from the OFR’s
cleared repo collection.
Figure 1. Intraday Rates on Sept 16-18 in Tri-party and DVP
Note: Rates are volume-weighted averages.
Sources: OFR Cleared Repo Collection, Office of Financial Research
On September 16, rates did not increase until the
afternoon and began increasing in the DVP-brokered market, most of which
consists of trading between primary and nonprimary dealers. Volume was
relatively low because 70%-80% of the day’s trades had already been
negotiated by the time these spikes erupted, suggesting that only a
limited number of firms were impacted by higher rates.
However, on September 17, the average rate in the
tri-party segment (which is composed of banks and money market funds
lending to dealers) rose to 6% and remained high for much of the traded
volume that day. Following the Federal Reserve’s intervention at 9:30
a.m., rates declined substantially in the DVP-brokered market but
remained elevated in other segments of the market throughout the day.
What Caused the Spike?
Rates
in the repo market are highly dependent on the supply of Treasuries and
reserves. By mid-September 2019, aggregate reserves had declined to a
multiyear low of less than $1.4 trillion while net Treasury positions
held by primary dealers had reached an all-time high. As a result, the
reserve constraints on banks and bank-affiliated dealers may have played
a contributing role in the repo spike....
....MORE
If interested see also the Federal Reserve Board's after-action report at FEDS Notes February 27, 2020:
What Happened in Money Markets in September 2019?
We've been picking at this scab for a few years and as noted above, will continue picking.
There is something odd about the timing and extent of the dislocation that is intriguing as can be.
As noted in 2021's Money, Money, Money: "A Self-Fulfilling Prophecy: Systemic Collapse and Pandemic Simulation":
....Follow the money
In
pre-Covid times, the world economy was on the verge of another colossal
meltdown. Here is a brief chronicle of how the pressure was building
up:
June 2019: In its Annual Economic Report,
the Swiss-based Bank of International Settlements (BIS), the ‘Central
Bank of all central banks’, sets the international alarm bells ringing.
The document highlights “overheating […] in the leveraged loan market”,
where “credit standards have been deteriorating” and “collateralized
loan obligations (CLOs) have surged – reminiscent of the steep rise in
collateralized debt obligations [CDOs] that amplified the subprime
crisis [in 2008].” Simply stated, the belly of the financial industry is
once again full of junk.
9 August 2019: The BIS issues a working paper
calling for “unconventional monetary policy measures” to “insulate the
real economy from further deterioration in financial conditions”. The
paper indicates that, by offering “direct credit to the economy” during a
crisis, central bank lending “can replace commercial banks in providing
loans to firms.”
15 August 2019: Blackrock Inc., the world’s most powerful investment fund (managing around $7 trillion in stock and bond funds), issues a white paper
titled Dealing with the next downturn. Essentially, the paper instructs
the US Federal Reserve to inject liquidity directly into the financial
system to prevent “a dramatic downturn.” Again, the message is
unequivocal: “An unprecedented response is needed when monetary policy
is exhausted and fiscal policy alone is not enough. That response will
likely involve ‘going direct’”: “finding ways to get central bank
money directly in the hands of public and private sector spenders” while
avoiding “hyperinflation. Examples include the Weimar Republic in the
1920s as well as Argentina and Zimbabwe more recently.”
22-24 August 2019:
G7 central bankers meet in Jackson Hole, Wyoming, to discuss
BlackRock’s paper along with urgent measures to prevent the looming
meltdown. In the prescient words of James Bullard, President of the St Louis Federal Reserve: “We just have to stop thinking that next year things are going to be normal.”
15-16 September 2019:
The downturn is officially inaugurated by a sudden spike in the repo
rates (from 2% to 10.5%). ‘Repo’ is shorthand for ‘repurchase
agreement’, a contract where investment funds lend money against
collateral assets (normally Treasury securities). At the time of the
exchange, financial operators (banks) undertake to buy back the assets
at a higher price, typically overnight. In brief, repos are short-term
collateralized loans. They are the main source of funding for traders in
most markets, especially the derivatives galaxy. A lack of liquidity in
the repo market can have a devastating domino effect on all major
financial sectors.
17 September 2019: The Fed begins the
emergency monetary programme, pumping hundreds of billions of dollars
per week into Wall Street, effectively executing BlackRock’s “going
direct” plan. (Unsurprisingly, in March 2020 the Fed will hire BlackRock to manage the bailout package in response to the ‘COVID-19 crisis’).....
