Passa ai contenuti principali

Year-End Repo "Crisis" Ends With A Whimper Amid Massive Liquidity Glut

It was supposed to usher in a market crisis that would prompt the Fed to launch QE4 according to repo guru Zoltan Pozsar. In the end, the preemptive liquidity tsunami unleashed by the Fed in mid-December which backstopped just shy of $500 billion in liquidity, proved enough to keep any latent repo market crisis at bay.

The year's final overnight repo operation, which the Fed expanded to as much as $150 billion ended up being just 17% subscribed, as Dealers submitted only $25.6 billion in securities ($15.2BN in TSYs, $2BN in Agencies, $8.35BN in MBS) in the year, and decade's, final overnight repo meant to bridge the financial system's short-term funding needs into 2020.
As a result of the Fed's massive, preemptive liquidity backstop, the overnight G/C term repo rate quickly dropped back to a subdued, and quite normal, 1.55% after starting the day north of 1.80%.
One thing is certain: last New Year's firework, which saw the overnight G/C repo rate shoot up as high as 5% into Jan 1, 2019, will not repeat itself.
The final hint that a repo crisis would be averted came on Dec 30, when the Turn repo rate dropped another 75 basis points from 2.75% down to 2.00%, confirming that dealers had lost all fears of a year-end funding squeeze. This happened after only $8.3 billion showed up for the 15 day term operation out of a possible $35 billion On Monday. And, as Curvature's Scott Skyrm explained yesterday, turn rates rallied and the Fed RP term operation was well undersubscribed.
And so, with the "turn" collapsing and today's overnight repo confirming that all funding needs were met, Skyrm summarized the current, non-crisis state of the repo market as follows:
  • There is no more Repo market fear of a year-end rate explosion
  • Year-End is now trading more like a quarter-end
  • Given the rally in Turn rates, undersubscribed Fed RP operations can be considered to be due to banks getting funded and NOT to full balance sheets

And while a year-end repo crisis was averted thanks to a historic surge in the Fed's balance sheeet...
... two questions emerge: i) would this have been the outcome had Pozsar not published his report warning about a repo market fireworks had the Fed not unleashed an unprecedented $500 billion liquidity backstop, and ii) will the Fed be able to successful drain the hundreds of billions in excess liquidity it injected to avoid a funding paralysis, while sending stocks to all time highs? While we will never know the answer to the first question, the answer to #2 will be made apparent in the first weeks of 2020 when the Fed decides to either keep rolling its repo operations or end them, cold Turkey, risking another funding crisis for one simple reason: the true level of cash in the market, excluding Fed intervention, has collapsed and once again the entire financial system is living on Fed generosity.


--

Commenti

Post popolari in questo blog

Fwd: The Looming Bank Collapse The U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it.

After months  of living with the coronavirus pandemic, American citizens are well aware of the toll it has taken on the economy: broken supply chains, record unemployment, failing small businesses. All of these factors are serious and could mire the United States in a deep, prolonged recession. But there's another threat to the economy, too. It lurks on the balance sheets of the big banks, and it could be cataclysmic. Imagine if, in addition to all the uncertainty surrounding the pandemic, you woke up one morning to find that the financial sector had collapsed. You may think that such a crisis is unlikely, with memories of the 2008 crash still so fresh. But banks learned few lessons from that calamity, and new laws intended to keep them from taking on too much risk have failed to do so. As a result, we could be on the precipice of another crash, one different from 2008 less in kind than in degree. This one could be worse. John Lawrence: Inside the 2008 financial crash The financial...

Charting the World Economy: The U.S. Jobs Market Is On Fire - Bloomberg

Charting the World Economy: The U.S. Jobs Market Is On Fire - Bloomberg https://www.bloomberg.com/news/articles/2019-12-06/charting-the-world-economy-the-u-s-jobs-market-is-on-fire Charting the World Economy: The U.S. Jobs Market Is On Fire Zoe Schneeweiss Explore what's moving the global economy in the new season of the Stephanomics podcast. Subscribe via  Apple Podcast , Spotify or  Pocket Cast . The last U.S. payrolls report of the decade was a doozy, beating expectations and doing its bit to keep the consumer in good health heading into 2020. That's good news given the various pressures still weighing on global growth. Here's some of the charts that appeared on Bloomberg this week, offering a pictorial insight into the latest developments in the global economy. U.S. Advertisement Scroll to continue with content ...

The Inverted Yield Curve: Why It Will Not Lead To A Recession This Time | Seeking Alpha

The Inverted Yield Curve: Why It Will Not Lead To A Recession This Time | Seeking Alpha The Inverted Yield Curve: Why It Will Not Lead To A Recession This Time Apr. 23, 2019 8:41 AM ET Historically, an inverted yield curve has invariably led to a recession. We are currently experiencing an inverted yield curve. We have two reasons for the current inverted yield curve: the central banks irrationally raising short-term interest rates and investors expect a recession because of the extended boom period. The two reasons are not enough to lead to a recession, and other structural changes in the economy are pointing to a boom rather than a recession. Investors can capitalize on the current situation if they believe that the inverted yield cure would not lead to a recession. Summary and Paper Thesis Although an inverted yield curve led to a recession almost without exception in the last 50 years within a relatively short period of time after the inversion happened, this pap...