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Reverse Repo Test #3 Now A Fact: $225 Million In Liquidity Sopped Up By Fed

Tyler Durden's picture


Just a day after the second reverse repo test was conducted, the Fed has launched repo test #3: this time, as we expected, for a greater (if still notionally meaningless) amount of $225 million, compared to yesterday's $180 million. The term of this operation is just one day, compared to the 8 and 3 in tests #2 and #1. The increasing frequency of these Temporary Market Operations should be making the liquidity bulls very nervous. And as we pointed out yesterday, the notional on the repo test "can only go up" - so far we have been proven right. Yet wait for the collateral to move down from Treasurys. That's when all hell will break loose.


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Wed, 12/09/2009 - 11:27 | Link to Comment Anonymous
Thu, 12/10/2009 - 12:12 | Link to Comment Anonymous
Wed, 12/09/2009 - 12:02 | Link to Comment bobby02
bobby02's picture

"Yet wait for the collateral to move down from Treasurys. That's when all hell will break loose. "

That's the 2nd time in 2 days you have written that. Why? If the counterparty makes good on the repo, the collateral is irrelevant. Since we know the primary dealers are tbtf and will be saved, counterparty risk is zero.

(If counterparties at a later data move beyond the primary deals, then this may become an issue.)

Also, if we take you argument that the collateral will be shit, then the Fed is in the cat bird seat, since if the reverse transaction does not take place, the Fed has the cash and the counterparty the shit collateral, presumably with a minimal haircut (i.e. Fed gets more $)


Wed, 12/09/2009 - 12:35 | Link to Comment SayTabserb
SayTabserb's picture

Just a guess, but I think a reverse repo involving the Fed's MBS portfolio causes hell to break loose because any transaction which sheds light on the actual value of this stuff is very dangerous for the entire financial system. The actual "deal" of these toy transactions, insofar as they affect the parties involved, doesn't really matter.

Wed, 12/09/2009 - 12:23 | Link to Comment Anonymous
Wed, 12/09/2009 - 12:33 | Link to Comment Anonymous
Wed, 12/09/2009 - 13:18 | Link to Comment Assetman
Assetman's picture

I cannot imagine they would test more than $5 million of MBS collateral-- if any at all.  The issue is that you start coming up with market clearing prices on the collateral when you do these deals.  Then more pressure will be placed on the Fed to determine how much they paid for this junk in the first place.

Reverse repo or not, if I were a primary dealer, I'd stay the heck away from the MBS colleteral deals.

Wed, 12/09/2009 - 16:05 | Link to Comment Cursive
Cursive's picture

I can't square this either.  This trade cannot be unwound.  In fact, I never thought of it as a trade so much as a perpetual government backstop.

Wed, 12/09/2009 - 18:01 | Link to Comment Jim ODonnell
Jim ODonnell's picture

This is just a ploy by the FED to act as if QE is over, not so. Here is what I posted on this subject Dec 4, 2009 at 3:30 AM EST. So far it has worked, gold and most of the rest of the inflation trade has been chrushed.

Wed, 12/09/2009 - 20:25 | Link to Comment chinaguy
chinaguy's picture

Suppose the Fed (TBTF) marks the MBSs to 100% on the dollar, and they are traded to other TBTF banks, and bought back by the TBTF Fed. WHERE is the mark-to-market price disclosure that everyone is so worried about? I don't see where the problem (for the Fed & the other TBTF players) is in this, especially as the PDs have been treated so well in the past. 

What am I missing that is salient?


Wed, 12/09/2009 - 20:38 | Link to Comment demsco
demsco's picture

The reverse repo is for show only. QE is going nowhere. Interest rates are going nowhere. They are doing this to shut people up about the government funding huge bank profits. Now they simply can say, see we are trying to drain the system! We all know they cannot really do a meaningful liquidity drain, probably ever, or raise interest rates to a meaningful level, ever. If they did the collateral is dead and the debt servicing costs will be sky high before 10 years are up.

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