Izabella Kaminska made a seemingly innocuous little retweet yesterday:
Liquidity is starting to deteriorate, and a great insight into this is the Repo market. Failures to deliver (Bonds used as collateral in Repurchase agreements) have been elevated and are up 22% on a WoW basis. This is a sign of liquidity event brewing. pic.twitter.com/AkzKu9rnCU
— Deer Point Macro (@deerpointmacro) July 30, 2022
Except that, as she and a few other folk understand, it's not innocuous at all.
And unbeknownst to her (or the other folks) it marks the start of Repo Week!
First up, from Wolf Street, October 9, 2019:
I wish I could have sat in that meeting, watching the bewildered faces of Fed officials as they got hourly updates on repo rates blowing out.The FOMC meeting minutes released this afternoon – instead of being stuffed with mind-numbing language – were spiked with a practically riveting account of the repo fiasco as it was unfolding over September 17 and 18 while the FOMC was meeting.
The account lays out some reasons behind the repo fiasco, the Federal Reserve’s reaction to it, and the changes it implemented and is going to implement to prevent the repo fiasco from spiraling further out of control.
Deep trouble in the repo market that caused “volatility in unsecured rates” had already percolated into the minutes of the July 30-31 FOMC meeting. But apparently nothing had prepared Fed officials for what would happen in the repo market on September 16, the day before their meeting, and on September 17 and 18, as they were meeting: Repo rates blew out.
I wish I could have sat in that meeting, watching the bewildered faces of Fed officials, Fed staff, and other participants as they were getting hourly updates on where repo rates were at the moment.
Day 1 of the meeting: repo rates blew out, Fed responded with $75 billion repo. From the minutes:“Money markets were stable over most of the period [since the last meeting], and the reduction in the interest on excess reserves (IOER) rate following the July FOMC meeting fully passed through to money market rates.
“However, money markets became highly volatile just before the September meeting, apparently spurred partly by large corporate tax payments and Treasury settlements, and remained so through the time of the meeting.
“In an environment of greater perceived uncertainty about potential outflows related to the corporate tax payment date, typical lenders in money markets were less willing to accommodate increased dealer demand for funding.
“Moreover, some banks maintained reserve levels significantly above those reported in the Senior Financial Officer Survey about their lowest comfortable level of reserves rather than lend in repo markets [and so they didn’t lend to the repo market].
“Money market mutual funds reportedly also held back some liquidity in order to cushion against potential outflows.
“Rates on overnight Treasury repurchase agreements rose to over 5 percent on September 16 and above 8 percent on September 17. Highly elevated repo rates passed through to rates in unsecured markets.”
“Federal Home Loan Banks reportedly scaled back their lending in the federal funds market in order to maintain some liquidity in anticipation of higher demand for advances from their members and to shift more of their overnight funding into repo.
“In this environment, the effective federal funds rate (EFFR) rose to the top of the target range on September 16.
“The following morning, in accordance with the FOMC’s directive to the Desk to foster conditions to maintain the EFFR in the target range, the Desk conducted overnight repurchase operations for up to $75 billion. After the operation, rates in secured and unsecured markets declined sharply. Rates in secured markets were trading around 2.5 percent after the operation.
“Market participants reportedly expected that additional temporary open market operations would be necessary both over subsequent days and around the end of the quarter. Many also reportedly expected another 5 basis point technical adjustment of the IOER rate.”
Day 2 of meeting: second repo, from later in the minutes:....
....MUCH MORE
Again, "Minutes of the Federal Open Market Committee, September 17–18, 2019".
There was an intriguing hypothesis floated at The Philosophical Salon that posits it was the situation underlying the repo blowout, rather than Covid, that led to the previously unthinkable shutdowns of entire economies:
Money, Money, Money: "A Self-Fulfilling Prophecy: Systemic Collapse and Pandemic Simulation"
Is this why we had lockdowns?
And is it true that in Australian English the phrase "conspiracy theory" translates to "Next month's headlines"?
