Three Things About Today’s UST Sell-off, Beginning With Fedwire

Three relatively quick observations surrounding today’s UST sell-off.

1. The intensity. Reflation is the underlying short-run basis, but there is ample reason to suspect quite a bit more than that alone given the unexpected interruption in Fedwire yesterday.

At 12:43pm EST, most of FRBNY’s electronic services experienced an as-yet unexplained problem which interrupted service, including that of Fedwire. To this point, the New York branch has only confirmed the disruption – lasting several hours – took place, which has been blamed on an unspecified “operational error.”

Reports indicate that settlement deadlines were extended into the evening, which can, and has in the past, led to short-term disturbances in interbank venues and conditions. Crypto exchanges, in addition to mocking the Fed, reported problems in their own clearing (since cleared up).

Since Fedwire reaches into all sorts of various plumbing parts of the system, right as we’ve been talking about these lately, this would include settlement, therefore, liquidity across several interbank spaces including US government securities.

There is precedence; in mid-August 1990, Fedwire went down for a combination of unlikely factors. I write about these, and deeper context, in more detail for publication tomorrow. Here’s the synopsis (I’ll add the link tomorrow when it gets published):

It began with a four-alarm fire, a literal fire, raging in downtown NYC, gutting a key electrical substation that served Wall Street’s primary infrastructure.

The ensuing localized blackout on Monday August 13, emptied skyscrapers, including an evacuation of the Twin Towers, before forcing the American stock exchange to early close and, according to the New York Times, “The bond market and foreign-exchange trading slowed because broker intermediaries who supply prices for buyers and sellers were cut off, their squawk-box intercoms suddenly quiet, their computers no longer humming.”

At the Federal Reserve Bank of New York, the power outage had meant the immediate deployment of backup power. Then, out of the blue, a water-cooling pipe ruptures on Thursday August 16 which unbelievably takes down two out of the three emergency electrical generators still feeding FRBNY’s vast computerized operations.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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