Friday, September 20, 2019

Flood Of Paper Looking For Repo

Following up on the repo market, the chart below shows the daily volume of tri-party repo transactions.  They have ballooned to some $2.5 trillion, up from $1.5 trillion in 2016 (blue line).  The entire increase has come from the Fedwire side, ie. repos involving Treasurys and Agencies as collateral (red line).   If you dig a little deeper in the NY Fed's data you will find that the $1 trillion increase is split roughly  60% Treasury bonds (+$600 billion) and 40% Agency MBS (+$400 billion).

Tri-Party GFC Repo - NY Fed

That's a huge increase for such a short period of time, obviously mirroring (a) a raft of new Treasury bond issues to finance Mr. Trump's ballooning budget deficits and (b) lots of new real estate mortgages securitized by the likes of Ginnie, Fannie and Freddie. The shrinking of the Fed's balance sheet also played a role.

At the same time, banks' excess reserves, i.e. a major source of funds that is used for repo funding purposes, have come down from $2.4 trillion to $1.4 trillion.That $1 trillion outflow is funding the increased needs of the repo market, quite obviously.


save image 
 Bank Excess Reserves

Let's call the difference between Excess Reserves and Total Repo the Excess Funding Cushion. In early 2016 this cushion was approx. $1 trillion, i.e. there was lots of surplus liquidity around after funding the daily repo market  Today the difference is negative $1.1 trillion, i,e, there is no excess at all.

This means that on heavy repo demand days dealers have a more difficult time finding the liquidity they need and, if lenders get spooked by, say, risky geopolitical events, repo rates will zoom.  Thus, the Fed's intervention during the previous four days.

Analysts are already predicting the Fed's repo funding facility will become a semi-permanent fixture, a new round of QE in everything but name.  I think they have already christened it, too, something like"scheduled OMO", or such.

The takeaway from all this slightly esoteric stuff is simple: monetary liquidity is tightening in the US just as dealers' books are ballooning.  And in the business of trading securities, anything that even smells of tight liquidity creates high insecurity.


6 comments:

  1. Wow. Excellent post and research!

    ReplyDelete
  2. Thanks so much for this clear explanation of "slightly esoteric stuff" Hell. You are truly a beneficent teacher in an arcane arena.

    ReplyDelete
  3. In digging through the Repo data that I found at the NY Fed (which I didn't know about until your informative posts above, thanks), I noticed that on the Concentration tab, it appears that concentration of Agency and Treasuries in the top 3 dealers is on a significant increase while the concentration of equities is on a down trend. Looks like this also happened in the fall of 2011 when we had a little bump in the road to Fed prosperity as measured by the S&P 500.

    Anyway, as I said, just starting to learn about this so have no clue what I'm talking about. But I find it interesting that concentrations of "safe" assets are increasing and equity concentrations are decreasing at this time when you've also noted other interesting things regarding the Fed intervention in the Repo market.

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