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A Fearful Fed Keeps Pouring Money into the Repo Market

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A Fearful Fed Keeps Pouring Money into the Repo Market


The Fed announced on Thursday it is adding another $83 billion in "in temporary liquidity to financial markets." And, in a development that will surprise no cynic anywhere, the Fed also noted that it "may keep adding temporary money to markets for longer than policy makers had expected in September."

Specifically, this was another move to shore up and bail out the repo market, which has required the Fed's ongoing revival of quantitative easing (but don't call it that!), which has been going on since September. Thursday's move adds even more to the Fed's balance sheet. The Fed's total assets had been falling since early 2015, but last September the Federal Reserve again began buying assets in an effort to funnel money to the repo market. As Reuters reported at the time:

Cash available to banks for their short-term funding needs all but dried up earlier this week, and interest rates in U.S. money markets shot up to as high as 10% for some overnight loans … 

That forced the Fed to make an emergency injection of more than $125 billion … its first major market intervention since the financial crisis more than a decade ago, to prevent borrowing costs from spiraling even higher.

According to Caitlin Long, this tremor in the repo market was likely triggered by the fact that

Somebody — probably a big bank — need[ed] cash so badly that it [was] willing to pay a shockingly high cost to obtain it.

This happened in spite of the fact that repo loans are supposed to be among the loans with the lowest interest rates, because they are secured by supposedly low-risk collateral like US Treasurys. Repo loans involve a borrower temporarily trading an asset (usually government debt) in exchange for cash. Since the borrower is trading a low-risk asset, the interest paid to the lender is low as well.

But, in spite of all this alleged low risk and alleged high demand for US Treasurys, repo-market lenders decided they were unwilling to make loans at the usual rock-bottom interest rates. Given the Fed's ongoing intervention, it looks like the interest rate that would prevail in the marketplace — were the Fed to stay out of it — is much higher than monetary policymakers are willing to tolerate in their pursuit of ensuring easy money. Thus, the Fed has decided to buy up more government debt itself so as to inject more money into the system and bring interest rates back down.

There are at least two reasons why this could be happening — and why another flare-up in the market is likely.

The first is that demand for government debt may not be as high as people think. As the Congressional Budget Office reported Wednesday, the "deficit increased 12% over last year during the first quarter of fiscal 2020, jumping $39 billion to $358 billion." This is 12 percent above 2019's already-sky-high deficit levels in a year where just the deficit topped a trillion dollars during an expansion. This was quite a fear, and illustrated just how immense current deficit spending is in historical context.

That sort of deficit spending requires a lot of new government debt. And with all that new debt coming into the system, it may be that not everyone is willing to trade cash for it at quite the same rate as in the past. This adds to the stress on those who rely on easy and low-interest loans through the repo market. According to Bryan Chappatta at Bloomberg back in September:

The chaos in repo markets was a long time coming given the widening U.S. budget deficits and the lenders that are financing that shortfall. …

Deficits, while nothing new, add up over time. And while they declined each year from 2011 through 2015, both overall and as a percentage of gross domestic product, the gap has widened again under President Donald Trump. Put it all together, and the amount of U.S. Treasury securities outstanding has roughly tripled since the financial crisis:

This growth was mostly under control in the years after the financial crisis because the Fed had been buying up large chunks of the Treasury market through its quantitative easing programs.

Naturally, this helps prop up demand for government debt. Foreigners, however, have grown less enthusiastic. According to Reuters,

Foreign investors sold a record amount of U.S. Treasury bonds and notes for the month of December. … December’s outflow was the largest since the U.S. government agency started recording Treasury debt transactions in January 1978.

It would likely be wrong to say that foreign holders of debt are dumping US debt, or that demand looks like it's about to collapse. After all, benchmark US ten-year Treasury yields actually fell in December. Nonetheless, it appears doubtful that foreign demand can keep up with the constant waves of new debt being demanded by US lawmakers for ever more deficit spending.

Chappatta continues,

There are simply too many bonds (or, in the language of the repo market, “collateral”) sloshing around in the financial system and not enough cash on the other side of the trade. … Without the Fed helping to finance deficits by accumulating Treasuries, the financial system seems doomed to seize up. Someone has to take what the Treasury is offering.

After a few years of the Fed easing up on asset purchases, it wouldn't be shocking if the ongoing tsunami of new debt led to a cash problem in the repo markets. In fact, a December report from the Bank of International Settlements (BIS) made a connection between a heavy load of Treasurys and a lack of dollars, especially in light of growing needs for funding at highly leveraged hedge funds:

US repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (eg hedge funds) via Treasury repos appears to have compounded the strains of the temporary factors.

It makes sense now to pursue more cash and fewer Treasurys. The BIS report also suggests these large amounts of government debt in the banks' portfolios really only made sense during the Fed's ongoing quantitative easing. But in mid-2019 — with the Fed no longer buying up assets — Treasurys were increasingly becoming a problem. A higher demand for dollars ensued, and the repo market seized up.

The Hidden Risks behind Government Debt

There's another problem with Treasurys. It turns out they're not as low-risk as many assume, but not in the way many think. Long writes:

But US Treasuries are not risk-free. Far from it. (By this, I’m not referring to the US potentially defaulting on its debt obligations. Rather, I’m referring to the practice in the repo market that allows more people to believe they own US Treasuries than actually do. It’s called “rehypothecation.”) …

For every US Treasury security outstanding, roughly three parties believe they own it. That’s right. Multiple parties report that they own the very same asset, when only one of them truly does. To wit, the IMF has estimated that the same collateral was reused 2.2 times in 2018, which means both the original owner plus 2.2 subsequent re-users believe they own the same collateral (often a US Treasury security). …

This is the real reason why the repo market periodically seizes up. It’s akin to musical chairs — no one knows how many players will be without a chair until the music stops. Every player knows there aren’t enough chairs. Everyone knows someone will eventually lose.

Financial regulators can’t publicly admit to this, but big banks know it’s true — and that’s why they hunker down (and stop lending) when they sense one of their kin is in trouble.

Financial markets are complex things, so it's unlikely that the repo market's ongoing need for easy Fed money is due to any single cause. But as Thursday's announcement of additional cash injections from the Fed suggests, financial institutions are happy to trade in Treasurys for cash. The Fed is providing the cash, but it's unclear how many others are willing or able to do so.


Contact Ryan McMaken

Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for Mises Wire and The Austrian, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

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They are predicting another bubble to happen between 2020-2025.


Nobody learned anything from 2008!

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On 1/13/2020 at 10:57 AM, விவசாயி விக் said:

They are predicting another bubble to happen between 2020-2025.


Nobody learned anything from 2008!


"Please note I (Kadancha) do not respect the clown named Mark Carney."



Central banks running low on ammunition to fight recession, Mark Carney warns

Central banks may not be able to fight off a sharp economic downturn because their monetary policy arsenals are still depleted following the global financial crisis, outgoing Bank of England Governor Mark Carney has warned.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time,” Carney said in an interview with the Financial Times.

“If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space.”

The BoE has raised interest rates to 0.75 per cent – slightly above their emergency levels during the global financial crisis a decade ago.

Carney – who has just over two months left in office – has previously raised concerns about the risk of a “liquidity trap”, in which central banks run out of the ammunition needed to combat a downturn because demand is so weak. 

Financial Conduct Authority head Andrew Bailey is due to take over from Carney as BoE governor in March. Carney will take up a role as a special United Nations envoy for climate action and finance.

In a wide-ranging interview, the central banker also reiterated his view that the UK should not align its financial regulations with the EU post-Brexit.

“It is not desirable at all to align our approaches, to tie our hands and to outsource regulation and effectively supervision of the world’s leading complex financial system to another jurisdiction,” Carney told the FT.

He also predicted that the City could benefit from financing the transition to a low-carbon economy in place of some EU activity once Britain leaves the bloc.

“This happens to be a huge commercial opportunity for the City of London and the UK financial sector writ large.”

However Carney said that the financial sector could not combat climate change alone, adding: “I don’t think the financial sector should be or will be a substitute for climate policy.”

“I don’t think that climate policy should be run by stealth though capital ratios or other use of prudential policy to shift incentives,” he said.

Edited by Kadancha
add info.

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    • ஓம் இது ஒரு பெரிய பிரச்சனை இலங்கையில்.எங்களை மாதிரி இளசுகளை எல்லாம் முதியோர் பட்டியலில் சேத்துப்போட்டாங்கள் பாவிகள்.
    • இலங்கை அரசின் உண்மை முகத்தினை சர்வதேசம் தெரிந்து கொள்ளப் போகிறது :சி.சிறிதரன் கல்மடு வட்டார இணைப்பாளர்கள் மற்றும் பொது அமைப்புக்களின் பிரதி நிதிகளுடனான சந்திப்பு ஒன்று நேற்று பிற்பகல் ஆறு மணியளவில் இடம்பெற்றது கல்மடுவட்டார பிரதேச சபை உறுப்பினர் ச.ஜீவராசா தலைமையில் நடைபெற்ற இக் கலந்துரையாடலில் பாராளுமன்ற உறுப்பினர் சி.சிறிதரன் ,பச்சிலைப்பள்ளி தவிசாளர் சுரேன் ,பிரதேச சபை உறுப்பினர்களான சிவமோகன் ,வீரபாகுதேவர் ஆகியோர் கலந்துகொண்டனர் இக் கலந்துரையாடலில் இதுவரை தமிழ் தேசியக் கூட்டமைப்பால் முன்னெடுக்கப்பட்டுள்ள அபிவிருத்திகள் ஆராயப்பட்டதுடன் மேலும் செய்யப்பட வேண்டிய அபிவிருத்திகள் தொடர்பிலும் ஆராயப்பட்டது அதனைவிட குறித்த பிரதேசத்தில் மக்கள் எதிர்நோக்குகின்ற பிரச்சனைகள் மற்றும் அதன் தீர்வுகள் தொடர்பிலும் தீர்மானங்கள் எடுக்கப்பட்டது இதன் போது கருத்து தெரிவித்த பாராளுமன்ற உறுப்பினர் சி.சிறிதரன் இதுவரை எம்மால் இக் கிராமத்திற்கு பல்வேறு அபிவிருத்திப் பணிகளை செய்திருகின்றோம் அபிவிருத்தியை மட்டும் நாம் பார்க்கமுடியாது காணாமல் போனவர்களது பிரச்சனை ,காணிகள் விடுவிப்பு ,அரசியல் கைதிகளின் விடுதலை ,நிரந்தரமான அரசியல் தீர்வு என அனைத்து விடையங்களையும் சம நேரத்தில் கையாண்டு வருகின்றோம் நாளை மறுதினம் கூட ஜெனிவா கூட்டத்தொடர் நடைபெற இருக்கிறது அதில் இலங்கை அரசின் பிரதிநிதிகள் கலந்துகொள்ள உள்ளனர் இக் கூட்டத்தொடரிலையே இலங்கை அரசின் உண்மை முகத்தினை சர்வதேசம் தெரிந்து கொள்ளப் போகிறது இலங்கை ஐநா தீர்மானத்திருந்து விலகுவதாக அறிவிக்கப் போகிறது இலங்கை அரசு காலம் காலமாக திர்மானக்ளில் கைச்சாத்திடுவதும் கிழிப்பதும் கிழிப்பதுமாகவே உள்ளது இக் கூட்டத்தொடர் ரை தொடர்ந்து நாட்டில் பாராளுமன்றத் தேர்தல் நடைபெற உள்ளது காணாமல் போனவர்களை தமிழ்த்தேசியக்கூட்டமைப்பு பின்னின்று அரசுக்கு எதிரான அழுத்தத்தினை கொடுப்பதாகவும் ,சில்வா விற்கான அமெரிக்க தடை போன்றவற்றை காரணம் காட்டி நாட்டின் அனைத்துப்பகுதிகளும் ஒரு கட்சியாக அறுதிப் பெரும்பான்மையை பெற சிங்கள அரசு பிரச்சாரம் செய்ய ஆரம்பித்துள்ளார்கள் ஆனால் வடக்குக் கிழக்கில் அரச முகவர்கள் ,கட்சிகள் , குழுக்கள் என நாற்பது கட்சிகள் போட்டியிட உள்ளனர் . இவர்கள் அனைவரும் தமிழ்த்தேசியக்கூட்டமைப்புக்கு எதிராக வசைபாடப் போகின்றார்கள் ஆனால் தமிழ்த்தேசியக்கூட்டமைப்பு பொது எதிரியான அரசுக்கு எதிராகவே பிரச்சாரத்தை முன்னெடுக்கப் போகிறது இத் தேர்தலில் கட்டாயம் இருபது ஆசனங்களை கூட்டமைப்பு பெற்றால் மட்டுமே வலுவான சக்தியாக இருக்க முடியும் ஆகவே எதிர் வரும் தேர்தலில் அனைவரையும் வீட்டுக்கு வாக்களிக்க வேண்டும் எனவும் கேட்டுக் கொண்டார். http://www.vanakkamlondon.com/இலங்கை-அரசின்-உண்மை-முகத/
    • இலங்கையில் இன்னமும் சூரிய கலங்கள் மூலமாக, அல்லது காற்றடிகள்மூலமாக பெருமளவில் கொளவனவு செய்யக்கூடிய அளவில் தனியார் திட்ட்ங்கள் இன்னமும் அமுல் படுத்தப்படவில்லை। இந்தியாவின் தனியார் மின் வழங்கும் கம்பனிகளும் இன்னும் உருவாகவில்லை । இருந்தாலும் இலங்கையில் உள்ள தனியார் கொம்பனிகளிடம்  டீசலில் இயங்கும் பெரிய மின்பிறப்பாக்கிகள் இருக்கின்றன। இங்கும் பெரிய ஊழல்கள் காணப்படடாலும் வேறு வழிகள் இல்லை।  
    • நான் 12 வயது மட்டும் இந்த வெளிச்சத்தில் மண் வீட்டில் வாழ்ந்திருக்கிறேன்.
    • மக்கள் புலிகளினால்  பாதிக்கப்பட்டிருக்கலாம் , அரசாங்கத்தினால் பாதிக்கப்பட்டிருக்கலாம்। அதை  அந்த  மக்கள்தான் கூற வேண்டும்।  இருந்தாலும் புலிகளின் சித்தாந்தமோ அல்லது வேறு ஒரு சித்தாந்தமாகவோ இருக்கலாம்। தமிழ் மக்களின் அரசியல் தீர்வை அரசு வழங்குமாக இருந்தால் எந்த சித்தாந்தமும் தேவைப்படாது। எனவே அரசுதான் இதட்குரிய பதிலை வழங்க வேண்டும்।