E BIS Explains Repo, But There Is More With The Banks

The BIS explained Repo difficulties, by saying that the banks just had too many treasuries and had no desire to spend cash to buy more. This caused the repo spike in rates. So, what are the banks afraid of? It is simple. They don't want to be stuck with too many bonds when they all go negative.

It turns out that the BIS has revealed that the four large US banks involved in Repo have 50 percent of the treasuries in the banking system. They apparently did not want more and decided to keep cash instead.

This is what the BIS did not say. Clearly, the banks see that there is a speculative aspect of investing in treasuries when it is clear that those treasuries are headed to negative yields.  As Penserra says:

You fork over $100 to buy a 10-year Treasury bond, an investment instrument backed by the full faith and credit of the United States of America, and a decade later, when the bond matures, you get back $94. 

As long as rates are positive, the banks will get back par. As for a real world example, Penserra goes on to show this negative rate regime is good for governments but horrible for banks:

Moreover, on August 20, Germany sold 834 million euros of 30-year debt that will require the government to pay back 795 million euros when the bonds mature in 2050. 

The same could happen with 10-year bonds, as the government could sell the debt and pay less back in 10 years than they received for the sale. This is nuts of course. But Donald Trump is drooling for negative yields. Trump tweeted in August, 2019 that he admires Germany's negative regime.

So Germany is paying Zero interest and is actually being paid to borrow money, while the U.S., a far stronger and more important credit, is paying interest and just stopped (I hope!) Quantitative Tightening. Strongest Dollar in History, very tough on exports. No Inflation!.....

So, this becomes a stealth tax on the big banks. Maybe they deserve it. But even if they do, the cost will be severe. Are the four big banks powerful enough to strike any time they please, forcing snapbacks in rates as happened in September, 2019? Obviously, Trump woke up a sleeping giant with the banks. He is still calling for lower rates from the Fed, which actually has a responsibility to keep the banks solvent,squeezing the Fed.

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Disclosure: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment ...

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