With Special Repo Negative Again, Is General Collateral The Next "Buck-Breaking" Source Of Frozen Liquidity?

Tyler Durden's picture

Back in April, Zero Hedge first exposed the impact on the repo market as a direct consequence of the then introduced FDIC assessment rate, which pushed general collateral rates to just above zero, and in some cases, outright negative. Since then GC repo rates have meandered well lower than the historical average, somewhere in line with the IOER, and the ongoing 20 bps arb available to banks who have the wherewithal to arbitrage the GC-IOER spread, indicates that not all is as it should be with the repo market. This was to be expected once the FDIC started messing around directly in the multi-trillion repo market. Well, courtesy of increasing tightness in European liquidity where contagion concerns have spooked money market participants, forcing them to enter the already thin GC market, rates have once again collapsed, and as Barclays' Joseph Abate points out, "Treasury collateral fell from around 6bp earlier this month to barely 1bp this morning. This means that every special issue – even those with only a modest premium in the repo market – trades at a negative rate." As a result, the GC and the special repo rate, together with participation in the ECB's MRO operation (update tomorrow) and Chinese SHIBOR, have now become the best indicators of what is truly happening in the liquidity underbelly of the multi-trillion unsecured market. Alas, this latest move has unpleasant implications for money market managers, who unable to find yield in repo (0.01%?) will now be forced to look for higher yielding assets, and thus expose them to even more contagion risk once the house of cards falls, facilitating the "breakage of the buck" once again just like what happened in the aftermath of the Lehman catastrophe, and snarling all global fund flows, forcing the Fed to become liquidity provider of last resort. But no need to worry about this: after all Bernanke's centrally planned economy would never let this happen.

More from Barclay's Abate:

Repo typically richens at quarter-end as dealers shrink their balance sheets ahead of quarterly reporting. We expect this normal richening to be amplified as the regular quarter end seasonal redemptions will likely be over-interpreted in the media as a sign of investor flight. However, like the mid-June corporate tax date, most of these redemptions will have nothing to do with investor concerns about money fund exposure to European banks. Nevertheless (and despite very high levels of seven-day liquidity), we expect money funds managers to be even more cautious than normal, ramping up their repo holdings while letting bank paper run off as much as possible. As a consequence, repo rates should linger under 5bp through mid-July.

The next part is what the FDIC and Bernanke should read when analyzing "systemic risk contagion 101":

The longer repo rates stay under 5bp, the more likely money funds are to reallocate toward higher-yielding assets. Some of the money parked temporarily in repo is likely to leak out into time deposits and non-European bank paper. We expect rates on this paper to fall as repo creeps higher – especially as some of the initial anxiety fades.

Of course all that is needed is for the only safe paper available to see an influx of safe money chasers, while other liquidity conduits to see departures en masse for true unintended consequences to rear their ugly head. So far the artifcially wide IOER-GC spread has not been much of a factor on overall liquidity. But now, with just 4 days left in QE2, things may change.

In theory, by steadily removing collateral from the repo market, the Fed’s daily purchases should consistently cause repo rates to fall. However, we find no evidence of any daily richening in overnight repo rates. Instead, it appears that the Fed’s daily purchases of roughly $8bn are too small to have much of an effect on the multi-trillion dollar repo market.

This will simply further push the cycle away from equilibrium.

Which begs the question: whereas as back in September 2008 money market were the culprit for the near apocalyptic liquidity freeze, will the culprit this time be the general collateral market, where everyone is now parked, and where a sudden and dramatic shift away from exorbitantly rich rates would likely have the same impact as the realization that everyone in Money Markets was swimming naked.

We don't know the answer. Unfortunately, we are 100% certain that neither do the Fed chairman.

Below is a chart of General Collateral in the past 6 months. Repoer beware.

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slewie the pi-rat's picture

well they've got the super short end epoxied to the floor

buzzsaw99's picture

Fund managers would rather risk losing substantially by buying crap paper than have the fund break the buck due to fees. That is why I moved out of the money fund and into short term (2-3y) bills. fuckkkking pussies, I would have stayed for a -.05% yield but I won't stay if they buy a bunch of crap. imbeciles!

SheepDog-One's picture

Manipulate everything to get past today, to live to manipulate the living hell out of everything 1 more day. Thats all they have left.

Franken_Stein's picture


All this fear-mongering for the last 1,5 years now.

The collapse is imminient, the collapse is imminent !


And what happened ?




Wake me up when there are dead bodies lying in the street,

before that it's all a non-event.


SheepDog-One's picture

Theyve got cold feet to go over the edge.

baby_BLYTHE's picture

the only reason they "fear-mongered" was so Hanky Panky could get taxpayer bacon for his buddies that made bad bets.

Yes, we would have had a bad 1-2 year deflationary depression but we would have already seen the worst by now and probably be growing above 6% or even higher.

A much worse collapse is coming, it is a certainty.

Marc Faber lays it out in a recent interview with the Daily Bell

Daily Bell: Do you still expect hyperinflation?

Marc Faber: In my view, the debt level, especially in the US, if we include the unfunded liabilities of Medicare, Medicaid, Social Security and these entitlement programs, is beyond repair. And this will necessitate printing more money. Also, in my view, there is no real political will to address the issues, because who ever would cut entitlements, will not be re-elected. So we have a tyranny of the masses.

Daily Bell: You said at one point there were no value investments left except for farmland and real estate in some emerging markets. Do you still believe this?

Marc Faber: I think that I was lucky because I kind of predicted the 2008 financial crisis; it took a while until it happened and I was worried about it for a number of years. If someone today would receive a billion dollars, it will be quite difficult to make a lot of money in the next 10 years. I am not saying if he puts the whole billion in gold, maybe gold will go up or if he puts the whole billion in silver, silver will go up. It would be quite risky for an investor to put the billion in one asset. Even if he diversifies, I don't think he will make a lot of money.

I think we had the collapse of the financial system in 2008; the failed institutions and failed system were bailed out by government. Ultimately governments will fail. The US and Europe will print money, and when everything fails, they'll go to war and then we have the complete collapse.



Bam_Man's picture

It was crystal clear from the outset that ZIRP would seriously disrupt/undermine the Repo and Commercial Paper markets and thereby force Money Market Mutual Fund managers to either close their funds or fill them with garbage assets so as to generate enough yield to allow for a 50 bps Management Fee (the whole point of the Funds' existence).

Well, it is pretty clear which option the vast, vast majority have chosen.

Franken_Stein's picture


I never understood why someone would trust someone else with managing his money ?


If one is too stupid to make educated investment decisions, then how come he/she became so rich in the first place ?


And what is so hard to understand about buying gold/silver or go long oil (longterm) ?

These are no-brainers and any idiot can figure this out.


Bearster's picture

There's a reason why civilization thousands of years ago developed specialization of labor.  But it all breaks down when everyone adopts pragmatism and no one is worthy of any trust.

Good thing you don't need to rely on your doctor...

snowball777's picture

a) inheritance

b) lottery

c) insurance payout (Larry H. Parker got me $2.1M)

d) ...


buzzsaw99's picture

vanguard was charging .22% and still felt they had to close one of their funds.

Bam_Man's picture

Vanguard is an exception. Their management fees are among the industry's lowest across virtually all fund categories.

It's the other 99% people should be worries about.

FubarNation's picture

Jesus Tyler you really make my brain hurt sometimes. 

RobotTrader's picture

Huge day for the leading consumer growth stocks today (AMZN, LULU, CMG, FOSL, etc.)

If the market were to crash, I'd expect those to be taking incoming fire, but so far, they are getting strong bids.

Gold and oil stocks are pretty much dead, but if they start grinding up, the I'd say the lows are probably in.

Minyan Vince's picture

buy gold stocks this summer...

Robslob's picture

Why isn't TZOO on your pump list anymore?

Franken_Stein's picture


Did yo know that the U.S. is using B2 bombers and helicopter drones against Gaddhafi ?

Last week one of these helicopter drones was shot down.

They're called FireScout and operated by the navy.




LongBalls's picture

Oil is starting to look purty! If it hits 85 I'm dumping in the family heirlooms.

chump666's picture

And China has become a systematic risk engine via SHIBOR and posturing buying EU debt (only to sell EUR).

Money on Shainghai major sells off next 5hrs.


chump666's picture

 the french a-wipe getting the french taxpayer to underwrite Greek waste via French banks.  What a genius, problem French bonds will start to look shit with Asia slowing down rapidly