Are Reverse Repo Liquidity Suctions Approaching?

Tyler Durden's picture

Could this be the proverbial first step removing the trillions in excess Federal liquidity? Per Bloomberg:

Central bank officials are discussing plans to use so-called reverse repurchase agreements to drain some of the $1
trillion they pumped into the economy, said the people, who
declined to be identified because the talks are private. That’s
where the Fed sells securities to its 18 primary dealers for a
specific period, temporarily decreasing the amount of money
available in the banking system.

Or maybe this is just yet another red herring, while the true liquidity pump continues until the bubble blows up under its own weight. Knowing the Chairman, everyone's money is on the latter. And in confirmation of just that:

There’s no sense that policy makers intend to withdraw
funds anytime soon, said the people. The central bank’s
challenge is to decrease the cash without stunting the economy’s
recovery and before it sparks inflation. Fed Chairman Ben S.
Bernanke said in a July Wall Street Journal opinion article that
reverse repos are one tool to accomplish that goal without
raising interest rates.

Alas taking liquidity from PDs will be harder than weaning heroin addicts using metric ton injectable portions of methadone.

“One thing the Fed has to figure out is if they can launch
pilot programs without spooking the market and creating the
perception that they are about to tighten,” said Louis
Crandall, chief economist at Wrightson ICAP LLC, a Jersey City,
New Jersey-based research firm that specializes in government
finance. “They are discussing things like accounting issues,
and updating the governing documents to the volume of reverse
repos the dealer community could absorb.”

Looking at this market where downticks over the past month can be counted on one hand, it is unlikely that the market will be too happy if it were to be taken away its main bubble creating toy which is then translated into persistent block ramps using various algorithms in the absence of any real trading.

Yet there was no market hesitation today, as the S&P closed once more at year highs, without even a breather of hesitation, with tomorrow's FOMC unlikely to be even remotely surprising. As the table below shows, inflation expectations are only for show: nobody believes the Fed will have any response to the commodity price inflation that Americans may be witnessing. The real deflation is here to stay. Also the amount of people expecting a rate hike by December is now 5%, compared to the 59% at the market's lows in March. Which makes sense looking at Treasuries. However, to understand equities, feel free to call your friendly neighborhood PD, and also loop in whatever collocation boxes accept collect calls around your primary exchange. Don't worry, thanks to flash VoIP the boxes will already be expecting your call.

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SDRII's picture

i thought the fed paying interest on reserves was the tool to keep the liquidity out of the market? So now they will just do a reverse repo? What is the rate spread between a GC reverse repo and the rate paid on reserves? this sounds like a Bloomberg headline for the unwashed

MyKillK's picture

Thats why this makes no sense. How is this supposed to remove excess liquidity when the securities will be bought with excess reserves held at the Fed? They are just shuffling these securities around in a closed-loop system.

Anonymous's picture

Maybe the real point is to raise more money for the FED (borrow) that Bernanke can then spend on propping up the Treasury auctions. He's already spent the $1 trillion in increased bank reserves he's pulled out of the banking system over the past year. But the deficit spending in nowhere near being fully financed so Geithner needs to raise more national debt. The money will go back into the economy once the government starts spending it, if the Congress ever gets those massive spending bills passed, like healthcare and cap & trade. In the mean time, if the government cannot spend it as fast as the money is raised, then Geithner can deposit it in the Treasury's account at the FED giving Bernanke even more money with which to prop up the Treasury auctions or buy more MBS crap. They are just postponing the inevitable.

californiagirl's picture

Could it be that Bernanke just wants to raise some more cash to prop up more Treasury auctions and buy more MBS?  He already spent the $1 Trillion in reserves he extracted from the banks in the past year.  Geithner needs to raise plenty more debt.  In the mean time, since Congress has not managed to pass the Cap & Trade and Healthcare, the government will not be able to spend it as quickly as it would like.  So Geithner can deposit the extra money into the Treasury's account at the FED and give Bernanke more spending money.  It is just postponing the inevitable.

MyKillK's picture

He already spent the bank reserves? This is not true, bank reserves are still as high as ever.

californiagirl's picture

I meant the cash the FED received from bank reserves on deposit at the FED. 

JOHNICON's picture

Anyone notice that lately, despite the ebullient sentiment, the indices are not skying everyday?  Or is it just me...?

Anonymous's picture

Up every day is still up every day. Based on nothing but fast cash.

kensdad's picture

Everyone is max long...  The VIX is crashing and Put/Call ratios are super bearish (skewed to calls over puts)...  The market is still going up on muscle-memory dip-buying.  When the correction arrives it's going to be vicious...  Still, you've got to have steel cojones to get short...

MyKillK's picture

The Fed has set up the conditions for a huge crash in October by conveniently scheduling the POMOs to be completed at the end of this month. Should be a very interesting month.

Anonymous's picture

the market is going up because a computer program is manipulating it up, controlling every tick. dip buyers have nothing to do with price action; they merely ride the back of this computer-guided FARCE. There will only be a crash/correction/0.3% dip when HAL9000 makes it so. I am not being facetious - the market is totally controlled and bogus. If it weren't totally controlled and bogus, it would move independently of wiggles in euro/yen.

MyKillK's picture

Something tells me the Fed is getting worried about being audited. Maybe the real plan is to use these reverse repos to offload the worst of securities at full value, and then when the audit is finished they take them right back because the dealers certainly won't want them.

Just throwing it out there. The timing just seems too coincidental. Audit the Fed bill gets its first committee meeting and almost immediately the Fed is in discussions with its dealers over 'exit strategies'...

deadhead's picture

"...these reverse repos to offload the worst of securities at full value"

or, the Fed can offload millions of shares of spy, bac, wfc, ad infinitum

MyKillK's picture

The more I think about it, the more I think this may be what they are up to. Otherwise, consider how completely ineffectual this move would be if the goal was to either reduce the Fed's balance sheet or to remove liquidity from the system. It won't remove any liquidity from the system, because the money was never really in the system to begin with. There's a giant mountain of bank money sitting at the Federal Reserve as excess reserves. Also, it won't really reduce the Fed's balance sheet because the repo is only temporary. But temporary is exactly what they'.d want if they just want to stow them away out of sight of any audit. Besides, any talk of reducing liquidity when interest rates are to be kept at 0-.25% seems crazy

Anonymous's picture

you do not seem to understand reverse purchase

the fed will sell securities it currently owns
to primary dealers for a temporary period of time...

the primary dealers will pay with money they
have or raise...

as such there will be a huge sucking sound
as money leaves the economy going into the fed...

thus the money supply is reduced - for the
term of the repurchase agreement...

those reserves in the fed are going no where
for the time being.....

this has nothing to do with a fed audit....

MyKillK's picture

Is there a specific reason why bank reserves could not be used to fund these purchases?

Ned Zeppelin's picture

Since the terms of the reverse repo will almost certainly require the return of the securities at the expiration of the contract term, they can hide, but they can't run from an audit. Easy question to track down.

MyKillK's picture

Ok, this is the kind of answer I'm looking for. But, still, I am not convinced. If it's so difficult to run from an audit though, I have to wonder how all these banks managed to pass the so-called stress tests.

Anonymous's picture

What does Bernanke think when he pulls up the intra day action in AIG on his bloomberg for today - "This was the biggest insurance company in the world. Now it moves like this on rumors. Hmm, Must be those green shoots. I say, Normalcy is returning to the markets. Remind me to put that in the FOMC statement tomorrow."

D.O.D.'s picture

Yes, and don't leave out, 'recovery will be sluggish for a time'.

Anonymous's picture

There has been only one policy for 10 years; easy money. It won't change until the USD breaks. No way.

Bam_Man's picture

You're being WAY too easy on them.

Monetary policy has been totally asymmetric (as in "EZ-Money, all the time") ever since September 1992, when Fed Funds was lowered to 3.00% and left there for a year-and-a-half in order to inflate the equities bubble. That's 17 years and counting.

At the end of the day, push eventually WILL come to shove, and the Fed will be forced to defend the dollar to prevent a run on all US $ denominated assets. But that's probably going to be a 2011-2012 problem, so party on!


I am a Man I am Forty's picture

At the rate the dollar is dropping, it will be within two months.

Ned Zeppelin's picture

Shoring up the dollar is but a crisis away, easily arranged.

monkeyshine's picture

Not to be interpreted as a defense of all things, but, the dollar has been the reserve currency for the rest of the world since long before that, and during the last 17 years in particular the ROW has had incredible expansion and appetite for spending. Loose dollar policy can be "blamed" for the greatest economic expansion in the history of the world. It hasn't been all bad.

Anonymous's picture

We've been having a few large distribution days. Commercial short interest is really starting to build in a lopsided way.

We're looking for a correction to start on October 12th and deliver about a 320 point downturn in the S&P.

mule65's picture

Of course you're Anonymous.

Missing_Link's picture

Oh, OK.  I'll take your word for it, Mr. I Make Random But Very Specific Predictions With No Arguments Whatsoever To Back Them Up.

fotokemist's picture

Shold MyKillK be correct, is there any reason that the audit cannot include all transactions for, say, the past two years?

Anonymous's picture

people people people...please think before
engaging keyboard....

the fed audit has NOT been voted on let alone passed....
for fuck's sake the house has not even started

these repo agreements will have a shorter duration
than the time it will require to ramp up an audit
assuming that it becomes law.....

the audit will NOT pass the senate with a veto
proof majority and it is almost certain that it
will not pass the senate at all....and if it
were to pass the senate mubrak will veto it....

these repo agreements have nothing to do
with audits...

it is a dead dead dead issue.

Brian Griffin's picture

Wow, that analogy is hilarious. 

TwoJacks's picture

I'll believe this reverse repo bidness when the dollar reverses. Until then, it's b.s.

MyKillK's picture

If this is a bluff, what does the Fed stand to gain for it?

Stevm30's picture

Temporary credibility from Treasury buyers - buys time for both them and the FED.  Maybe a miracle will happen!

MyKillK's picture

I don't believe that explanation. They don't need to buy credibility. They seem to be able to sell as much Treasuries as they so desire.

Stevm30's picture

Yeah now they do, but not once their $300 billion treasury program ends ($9 billion left)... high and dry.

jm's picture

There is plenty of money in the stock market to plug the hole.

MyKillK's picture

This is true. But it seems like a really weak attempt. Anyone involved in the bond market would see right through it.

lizzy36's picture

Alas taking liquidity from PDs will be harder than weaning heroin addicts using metric ton injectable portions of methadone.

classic tyler durden....

donatoloscalzo's picture

it will all end in tears....................i feel sorry for Bernanke: he has and still is doing everything and even more than humanly possible but..............

Lionhead's picture

I hope you also feel sorry for the millions of savers, retired folks, and assundry shareholders of all strips that are/have been penalized for his policies and wrong headed decisions. Add to that, the nation's young-lings that will be forced into paying off all this debt.

I have no tears for this man; may God judge him harshly for all the fellow citizens he's harmed.

ghostfaceinvestah's picture

I stand by my prediction that he will be the first to be hung as a traitor when the Revolution starts.

SteveNYC's picture

Solid prediction, I have been thinking the same thing. There is no more treasonous act than destroying the currency of a sovereign nation, the currency you have been mandated and paid to manage and defend, bringing about the ruin of its responsible citizens, destroying the fruits of their hard labor.

He will be judged harshly, and rightly so, in my opinion.

I am a Man I am Forty's picture

No offense, but I hope we don't have to leave it to an all powerful being to punish these guys.  I'm not convinced anyone upstairs is paying attention.

Stevm30's picture

Also he's not doing everything that's "humanly possible".  Instead, he's doing what is easiest, and getting all the bs political laurels from the media that comes with "taking the easy way".  For example: for further exacerbating a crises that we WILL have to eventually confront, he has been appointed to another term...  Remember how fawning his 60 minutes profile was?

Josey Wales's picture

I think this is a great idea, why just look at how good the treasury sales are of late!!!  I bet the primary dealers will be chomping at the bit to give some cash in exchange for Treasuries! 

Or perhaps the FED will issue these Re-REPOS, load the banks with treasuries, then POMO them back onto some FED balance sheet a week later like they do the treasury auctions. 

Maybe this story sells in the US but do foriegners actually believe this stuff???