GC At 2 bps Means Repo-IOER Carry Is Dead: Long Live FX Carry
As we discussed extensively last week, the Repo-Excess Reserve is now officially dead: the O/N GC rate just printed at a ludicrously low rate of 2 bps confirming that the Fed's future attempts to normalize the short end will be very entertaining to watch. A bigger problem is that now banks which previously had this "free money" trade to rely on for guaranteed Fed-funded profits are now straight out of luck.
Which means that the only carry trade is the tried and true FX funding trade: short crap currencies where there is no chance of a rate hike for years (such as the dollar and Yen) and go long currencies of growing developing countries whose central banks are tightening.
The chart below says it all, and explains why the Fed is between a rock and a hard place: a surge in the dollar will kill the market.
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