Repo Madness

64% probability of a 25 bp cut tomorrow.

(Click on image to enlarge)

The NY Fed has placed a $78B repo operation. From CNBC:

Repurchase operations in the bond market spun wildly Monday, with the overnight repo rate surging to as high as 8.5% while the Fed’s own funds rate hit the top end of the current target range of 2.25%. Market participants worried that the Fed might be losing the ability to keep the benchmark with the range.

They go on to note:

To be sure, strategists at Wells Fargo said such disruptions happen around the end of months, quarters and years, though it’s unusual to see it in mid-month.

More evidence that this month is not your typical September. 

The Fed will make an interest rate decision tomorrow with the backdrop of repo rates shooting higher and requiring $75B to calm them down. Whatever it does, there could be more volatility than usual.

We were contemplating opening an option straddle for tomorrow, but have decided against any action. We will continue to increase our long positioning on weakness.