Searching For Fail, And Still Finding It
While the credit markets were looking elsewhere these past few weeks, funding markets are again off their axis as repo fails spiked significantly one more time. The current level of fails is not quite that of June, but it is enough to engender some more pause about financial plumbing.
For the most part, explanations have been offered on the supply side, as in the supply of (lack of) collateral. QE has certainly played a large role with a direct impact on the availability of collateral supply. That wasn’t supposed to be the case as the Fed’s reverse repo program was supposed to alleviate any of these problems. Yet, here we are again wondering about the deepest reaches of financial funding in the wholesale banking system.
There is no short answer here, though I’m sure everyone wishes there was an easy indication. Looking at Primary Dealer holdings (inventory) of all manner of UST’s shows nothing much of a relatable phenomenon or movements. There is a very obvious decline in the inventory of t-bills, but that fits well within the recent paradigm of t-bill issuance and the Treasury’s variable deficit financing.
T-bill rates have been low, but nothing approaching persistently at or below zero which would be an obvious signal of stress with t-bills as marginal collateral. Most have surmised, myself included, that repo participants have been forced down the curve in search of larger stores of securities (supply side again) which is why repo trouble seems to be engaged in the coupons rather than bills (which was where most of history prior to the QE’s was focused)....MUCH MORE