Those Fed guys are so funny.

The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released the schedule of large-scale overnight and term repurchase agreement (repo) operations for the monthly period from April 14, 2020 through May 13, 2020.

The Desk intends to reduce the frequency of some repo operations during this monthly period in light of more stable repo market conditions (emphasis Lee).Beginning on Monday, May 4, 2020, the Desk intends to return to regularly conducting one overnight repo operation per day in the morning, and to remove the afternoon overnight repo operation.In addition, the frequency of three-month repo operations will be reduced to once every two weeks from once a week.  The Desk will continue to conduct one-month repo operations once per week.

The Desk will continue to adjust repo operations as appropriate to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets, consistent with the FOMC directive to the Desk.

Detailed information on the schedule and parameters of term and overnight repo operations are provided on the Repurchase Agreement Operational Details page.

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OK, Let me make on thing perfectly clear.

As if I haven’t already.

Because like I told you before, oh, they can’t do that.

The Fed is cutting repos because there is now ZERO demand for them.

From the beginning of Not QE back last September, I forecast that as the Fed ramped up full POMO (outright Treasury purchases) that TOMO (repos) would drop. The dealers don’t need to borrow repo money to finance their inventories because, A. the Fed is cashing them out,and B. The Fed is taking all their repoed inventory off their hands. It’s buying it outright.

That is in fact what happened. The process accelerated in March when the Fed switched from Not QE, which it started in September when the money markets froze up, to Pandemic Pandemonium Panic QE (PPPQE). Not QE was only $80 billion per month. Two weeks ago PPPQE got up to $300 billion PER WEEK in POMO cash direct into dealer accounts. 

So of course they no longer need repo. The Fed is pumping cold hard cash directly into dealer accounts.

This is not a “natural” improvement. This is not “more stable repo market conditions.” It only seems stable because the Fed has the market on life support. The Fed is a massive ventilator/heart-lung machine. The Fed is the market now. Without the Fed’s massive support, the market is dead. Flatlined.

It’s like when I had my heart attack back in 2016. As I lay there with my widow maker artery 90% blocked, the panicked doctors excitedly told me they had to hook me up to a heart pump to keep me alive overnight until they could get me into surgery. Sure, I felt fine. No pain. Never better. But without the machine, I could have died at any moment. Such are today’s repo market and bond market. They’re alive and functioning “smoothly” because they are on a pump that’s doing all the work.

Now the Fed has replaced TOMO, a temporary pump, with POMO- new organs. The dealers have more cash and less inventory to REPO.

But it also means that they are deleveraging. Their risk appetite is reduced. Their ability and willingness to sustain extended inventory builds and markups, to distribution, is non existent without Fed life support.

Even with it, that ability and willingness is limited. Once you’ve had a heart attack and bypass surgery, you tend to be a lot more risk averse. The dealers were dead and they knew it. They’re going to be a lot more cautious for a long time.

So the Fed is loudly telling us that all is well, there’s nothing to see here, so it is reducing the life support. What the Fed isn’t running around screaming from the mountaintops is that it is also REDUCING POMO! Operations this week will average $30 billion per day. That’s down from $75 billion a day two weeks ago.

The Fed is taking its foot off the gas. It wants to see if the market can coast mostly on its own so that it can get out of rehab soon.

Well, we’ll see about that. I think that this rehab stint will be long term. The body is too fragile, the damage too great.

As the Fed reduces its life support, the Treasury will keep bludgeoning the market with unfuckingbelievable amounts of supply every week. $50-60-100 billion a week. It must do so to finance the $2 trillion COVID rescue and the structural deficit that’s at least $1.5 trillion a year.

Do you think that the market can simply absorb all of that without the Fed buying most of it, or all of it like it has lately?

Maybe you do, but I don’t.

So the Fed will step in again, but not before another selloff.

Trust me boyz and gurls, there will be another selloff.

Just remember. Never trust anyone who prefaces a statement with, “Trust me.”

Trust, but verify.