Repo Market Madness And Flash Crashes?

Wait, what? You haven’t heard what’s going on in the plumbing of our great economy, markets and more specifically the recent US dollar funding crisis that occurred overnight?

$1.3 trillion in “excess reserves”, a Fed cutting rates, and the US financial system was urgently short $53 billion in immediate funding. – Zerohedge

In short, for the first time in more than a decade, the Federal Reserve Bank of New York stepped in to relieve pressures in the Repo market that were pushing short-term interest rates higher than the central bank wanted.

Strains developed Monday in short-term financing markets that suggested the central bank could lose control of its federal-funds rate, a benchmark that influences borrowing costs throughout the financial system. – WSJ

Here’s a Quick Primer on what is Repo and why we care all of a sudden: by @lebas_janney.

The freeze in overnight Fed lending was likely from the Treasury Sell-off last week that triggered the Growth-to-Value unwind I warned about, and now with Oil much higher, this puts at risk certain Hedge Funds from blowing up. Saudis liquidating positions to extract cash is another theory. Either way, NY Fed had to step in with EMERGENCY MEASURES.

“Bottom line: here’s what the market thinks of the Fed’s temporary solution… It’s a joke.” – @MacroMorning

Liquidity in funding markets only really matters when it’s not there. Jess already alerted us in August that 2yr Treasuries were at their cheapest levels in a generation – the Fed’s “worst case” scenario: Liquidity, Funding & the Gathering Storm.

Soon after, we had a 3.5 standard deviation move in Bonds, an 8.5 standard deviation move from Momentum to Value rotation… the largest one-day surge in Oil Prices in history and then Funding Spreads exploded HIGHER than Sept 2008 – and ALL in the span of Two Weeks!

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Leslie Miriam 9 months ago Member's comment