Will The Repo-Reserve Carry Trade Blow Up Force Bernanke To Pull Liquidity And Kill The Stock Market Rally Early?

Tyler Durden's picture

By now everybody knows that only a last ditch intervention by the G7 prevented the financial system from imploding three weeks ago, when the Yen carry trades blew up in the face of all those who had been short yen, long high yielding currencies. The result would have been a pervasive trading desk annihilation, possibly on par with that experienced after the Lehman collapse had the world's central banks not stepped in to sell Yen in droves. Yet what fewer know is that when it comes to funding cheap carry-type trades, the FX carry trade is merely one. A possibly far bigger one has been the one established courtesy of the Fed's generous Interest on Overnight Reserves (IOER) rate, which being far higher than General Collateral (GC) Repo, presents banks with Fed deposit access what was a sure way to earn guaranteed money on an interest rate arbitrage spread. For nearly two years banks collected the proverbial pennies in front of the rollercoaster... until last Friday, when the FDIC decided to spoil the party. What happened as a result of the FDIC's decision to establish an assessment rate which spoiled the arb, was a blow out for most institutions playing the IOER-GC carry trade leading to a major disruption in this funding market, possibly far more serious than the FX carry trade unwind, and a plunge in overnight GC repo rates on Monday (see chart) by over 75%! Does this mean banks have lost one key carry funding source? So it would appear. And it only means that the FX carry trade will be that much more a critical source of "risk-free" income for banks... At least until the next major earthquake above the ring of fire. In the meantime, as the Fed scrambles to restore normality to the repo market, will the Fed be forced to do Reverse Repos, which while fixing the carry trade, will withdraw far more liquidity form the market. Which as we all know is grounds for immediate incarceration in a Centrally Planned kleptocracy such as the USSA.


Of course, the only way to restore normality here is for the Fed to jump in and start conducting reverse repos, which will allow the carry trade to be restored for those institutions that are not subject to the assessment. However, by doing that, the Fed would also withdraw major liquidity from the market. The question becomes: is the continued viability of the banks courtesy of free funding worth a few hundred S&P points? Barclays thinks no way, Jose.

We are not so sure: with most banks now operating at massive leverage ratios, we are confident that quite a few will scream bloody murder and demand that the Fed do anything it can do restore repo market funding (aside from merely the noted arb, now that O/N GC rates are at record lows). And that would mean that broad liquidity is about to leave the system far over and above the amount injected by the Fed. The net result would be a very complex calculation involving liquidity coming in versus leaving. Making it doubly confusing, with the Fed gambling with the idea of pulling QE, the double whammy of suddenly being left with major Reverse Repo operations and no incremental liquidity, would result in a major impact to the market.

Will Bernanke pull the plug? It is unclear. However keep an eye on bankers preaching untold death and destruction unless Benny and the Inkjets restore the repo market. If Jamie Dimon gets involved, then Sell Mortimer.

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TruthInSunshine's picture

OT - I didn't even read this article, because the lunacy is getting so incredible & at such a fast pace, it's actually hilarious -


Keep inflation under control? They're going to install new cooling systems at Fukushima?


Robslob's picture

I think the headlines got mixed?

Japan is committed to keep "inflamation" under control.

Fed to install new cooling system to keep inflation under control.


TruthInSunshine's picture

I was early, because two equally hilarious if not more hilarious headlines were just posted:

The genius that is Plosser and all his henchmen at the Federal Reserve are "sorting out the causes of the financial crisis" and his buddy Lockhart says regulatory policy making is hard. You simply can't make this shit up. Back on topic - Gold and Silver and anything commod oriented are killing Bernanke, bursting his 'no inflation' bullshit, rendering it the ramblings of a criminal to the ears of even the most sheepified. Gold and Silver are crushing The Bernank.  A silver dagger to the heart of The Bernank.

Sudden Debt's picture


P&G is SELLING Pringles!!



we sure live in a changing world...

let's hope they don't change the recipe...

Caviar Emptor's picture

Talk about desperation! Pringles is a sure-fire non-glam money-maker. It's the type of bread and butter business that conglomerates used to be ecstatic to have in their portfolio. In desperate times however, there's a need to gamble on explosive growth (which can also explode). 

Let's hope China doesn't buy Pringles. If they do, leave the country

disabledvet's picture

i love Pringles.  I eat them.  They're wonderful.  Wall Street...if you screw up my Pringles I'm a gonna....

ml8ml8's picture

I love Pringles, but I can't eat them anymore.  I'm not like some big nutritionist or anything, but regular Pringles have almost 1 gram of fat per chip.  Every time I eat a bunch, I picture a large blobule of coalescing lipids in my stomach, and it makes me physically ill.  I call them "chips of death."  http://caloriecount.about.com/calories-pringles-original-i106605  (I think there are about 10 chips per serving.)  On an up note, they are good for about 6% of your RDA of Vitamin C.  I've never researched what substitute chemicals they use to replace fat in the not-original Pringles, but I figure it can't be much better for you.

Sometimes the truth sucks.

Flakmeister's picture

Didnt care for the Olestra version?

Pringles is shit food, a big problem with this country.

ParaZite's picture

Speaking of shit food... those damn Olestra chips caused diarrhea worse than bad Mexican food. 

Flakmeister's picture

I guess that is a running joke?


Nothing like "Anal Leakage" as a side-effect...

I mean seriously what the fuck has this country come to? Probabaly 90% of the population eats processed garbage and we wonder why the nation is obese and riddled with Type II Diabetes...Food is not supposed to come with a label listing side effects...

For the record, the last fast food I ate was in 2007, and I can count on 2 hands the number of times since 1994...

3.7.77's picture

Must be tough when you get the munchies.

Flakmeister's picture

I eat nuts.... cashews, filberts, brazilians, almonds, hazels... no peanuts

I get 16 oz bags of good low salt mixed nuts for $5.99 at Trader Joes, compare that to a bag of Doritos for $3.99.  I get cashew pieces for $2.99 a lb....

Even in a kush induced haze of muchies, you can't eat more than 1/4 of a bag. That is what real food is.

TruthInSunshine's picture

Flak, you are correct.

Processed foods are the bane of western civilization, and the reason for exponential increases in diabetes the world over (including India, now).

Most people have no idea that refined foods are far more unhealthy and lead to more adipose tissue (belly fat) and insulin resistance than ANY whole foods, including saturated animal fat.

Also, corn and potatoes (white, not sweet potatoes) are devoid of almost any nutrition, and in fact, white potatoes produce a higher insulin response than a soft drink.

Cash_is_Trash's picture

Off Topic: I wish to Thank Ben Bernanke today, on my 27th birthday for the returns in gold and silver shares to about 3% of my portfolios value.

Thanks Ben, you unscrupulous motherfucking sack of shit, your policies make our futures no brighter.


I Am Ben's picture

You are welcome citizen! And Happy birthday!

SteveNYC's picture

Good to see others in my generation onto the scam that is the Bernank and his merry band of Fed fakers. Spread the word.....

unwashedmass's picture

i'm equally happy. Boomer here who seized control of my 401(k)...liquidated all the idiot stocks that the "investment advisor" (little branch of C) bought me into....three years ago...

what had to stay there went into metals stocks.

what i could take out went into hard metal.

fuck you Ben. my retirement is not going to be seized by JPM. fuck you.

JoeSexPack's picture

Happy B-Day!

Gen X'r here, dumped my duplex in 06 & got on the Au/Ag train.

Looking forward to a long ride.

Ben Fleeced's picture

I kept tellin' people Xrs would shine. Still not sure of the Ys

Good on ya' !

one NxtGenr

Son of a Gr8st.

carbonmutant's picture

Less dollars... April 27th

gordengeko's picture

Nice catch TD, looks like Ben is in a little bit of a quagmire.  Pull the butt plug out on his favorite toy (the casino in the sky) or double down.  Fuck it, double down Ben and send our precious non-ferrous white metal to the moon!

Cleanclog's picture

The Portuguese bankers saying they "have virtually no more margin to buy country's debt" . . . if the Fed won't help the US bankers with POMO, then I'd have to wager, they also have no more margin to buy Treasuries.  

Who/What will buy and hold Treasuries?  Higher yields necessary? And then the perpetuating circle of higher yields and vortex of lower prices kicks in.  And carries over to muni's, sovereign debt everywhere, corporates, and credit illiquidity again.  3 years later and all the monetary medication for nil.

Captain Willard's picture

Tyler - Doesn't this mean that the Fed is trying to get banks to either 1) lend more money or 2) extend duration od their securities portfolio ?

In either case, the Non-Borrowed/REquired Reserves Ratio is very high. Banks are very liquid. This shouldn't be confused or conflated with leverage coming from large holdings of short-duration, low yield government/agency securities.

I do agree with you that much of the action has moved overseas to chase higher yields. Bill Gross said as much this morning on CNBC. And I believe you're right that FX action will get crazier as a result.

disabledvet's picture

or you can buy El Paso preferred/convertible and get yield right at home in a space that..., aw, forget it.

Flakmeister's picture

I have prints for EPPRC at 19.... heh, heh, heh...

alexanderstollznow's picture


"By now everybody knows that only a last ditch intervention by the G7 prevented the financial system from imploding three weeks ago, when the Yen carry trades blew up in the face of all those who had been short yen, long high yielding currencies. The result would have been a pervasive trading desk annihilation, possibly on par with that experienced after the Lehman collapse had the world's central banks not stepped in to sell Yen in droves."

is a real stretch, by any measure.  the move which prompted the intervention was a sharp selloff which occurred about 10 minutes after NY close ie no interbank, and was therefore hugely exaggerated.  it felll from 80 to 76.22, but had recovered all by itself to about 79 within an hour. the intervention which followed added a whole 1.5 yen to the pair, and left it where it was a day before that fall.  so, no, i dont think there was some major risk of runaway trading desk or institutional failure as a result of that brief spec selloff.  OTOH, the intervention might have had something to do with protecting japan's export competitiveness at a time when its economy is obviously under major stress.   or would that reason not be conspiratorial enough?

Tyler Durden's picture

You seem non-conspiratorially informed: please advise what the token P&L loss to FX desks across the world would have been if USDJPY had opened and closed at 76 the next day, had another G7 bail out not been factored in after hours?

alexanderstollznow's picture

when i worked on an fx desk, the purpose of the spot desk was to make a few pips here when they could, and offset the almost all of its net position to interbank and customers with offsetting interest.  there wasnt actually a lot of risk sitting on the fx desk, because that is not the role of an fx desk. hello! 

yes, there are bank employed prop traders and hedgies etc who have prop positions, but at any given time, and industry wide, they will be largely offsetting. so with any particular move, there are going to be winners and losers and the it isnt going to bring the banking system down.  just like it didnt during another carry trade unwind in 1998.  on that occasion, the pair fell 10 figures in a matter of an hour or two, and the banking system didnt fall apart.

in any case, the pair DID open the next day without intervention and it wasnt at 76. how much that was due to the expectation of intervention - and i agree that there was such an expectation - is impossible to say.  what can be said, however, was that the selling was specifically timed to occur minutes after NY interbank closed on the day, and, as such, i am very doubtful about the amount of selling which was involved, and therefore the significance of the size of the move.

prophet's picture

Hopefully large enough to have them resolved.

alexanderstollznow's picture

anyway, better stand down so you can all read the Fed Minutes :)

greased up deaf guy's picture

this is totally a nitpick, but i think you meant to say "pennies in front of the steamroller"... unless there's some entrenched symbolism that i missed.

getting whacked by a rollercoaster unexpectedly would leave a mark too, i suppose. :-p

XPolemic's picture

Actually, the carry trade is usually hedged with caps, floors and swaps (and THOSE instruments are usually hedged with FX fwds and options). So it would be the Fixed Income desk that would get hammered.

The loss would be unrealised until the subsequent coupon period,(edit) but the large change in price would cause the VaR to blow out in Yen sensitive positions (that are non-linear, such as options, by changing the moneyness. 80 to 76 being a 4000bp move after all, even 80 to 79 is 100bps intraday), causing Tier 1 capital requirements to blow out OR large scale unwinding of Yen sensitive positions, which would feed back into the volatility (through a change in open interest in long-short positions, hence the implied vol). This is a classic feedback loop that the financial system is not equipped to deal with.

The only way to prevent feedback-loop down-spiralling in modern financial markets is with government intervention, which is now pretty much guaranteed, so I guess the REAL question is, how much money is there to be made front-trading the intervention?


SDRII's picture

There is so much wrong with this statement where to start. Yen " recovered all by itself to about 79 within an hour" you sure about that? IF so, explain the insider view? Second if the half life on the "panic" was as short as you claim, why is the G7 still standing by to throttle the yen - look at the overnight trade. On the exports, the yen is becoming subordinate to the toxicity of the the food, supply chain etc. India banned all food imports this am. Also, the rush by the  BOJ to stamp out capital repatriation "rumors" was hurried, no? Especially when as you say there was no need for intervention in the first place. Swaps books please 

disabledvet's picture

you mean "throttle Japan"..."followed by their consent" of course.

alexanderstollznow's picture

"There is so much wrong with this statement where to start. Yen " recovered all by itself to about 79 within an hour" you sure about that?"

yes, i am sure of that.  low was 76.75. close of the next hour was 79.14. so i stand partically corrected:  it was back to about 79.00 within 90 minutes.  close of the hour after that was 79.54. mkt was about 79.40 when intervention kicked in.  irrespective of what 'standing by the throttle' may or may not mean, there was one round of intervention, it took the pair to 82.00, and the next 250 pts higher have occurred without any further assistance.

SDRII's picture

I didnt ask you to read the chart back to me. I asked you to describe to us the order flow from your insider perch that supports your claim in what is the largest and deepest market. waiting?

alexanderstollznow's picture

i didnt claim to have an insider view, and if you anything at all about fx, you will realise that absolutely noone does, as there is zero transparency as to how much is trading and who is doing it.  what i said is no more or less that i said, and it is part based on general experience and the rest is based on what i, and you, can see with our eyes.

you will also note that to the extent i am reading back the chart to you, i was answering your specific question as to whether i was sure the market recoved of its own accord in a specific time frame.

re the other matters raised.  if foreigners are buying fewer japanese products, they are buying less yen and selling less of everything else particularly USD.  ie another reason why a sharp move down in USDJPY was fake.  i am not aware of what the BOJ said about repatriation, but by the time the move occurred, i had already seen many stories on that subject and they were coming from both sides ie yes there will, no there wont, be large repartiation flows.  as there was absolutely no consensus as to whether such a thing would occur, i dont see that any expectation of it or otherwise, would have been reflected in price.

TruthInSunshine's picture

By the time this is long in the tooth, the Yen goes belly up, yellow fin tuna style.

You can take that to Fukushima.

fuu's picture

It took 24 hours before it broke back over 80 for the pair. Very visible on every chart i just rechecked.

max2205's picture

lots of balls in the air and only one spark required to start the supernova sequence.

saw this morning in wsj...cnbs....nothing

Attitude_Check's picture

I think a repeat of the crash in 2008 after a withdrawal of liquidity spiking the $, and dropping equities was ALWAYS the plan. Scare the dumb money into Treasuries and then drop a HUGE QE 3 bomb!

dracos_ghost's picture

I believe they will call it a "Kinetic Monetary Action" (KMA) -- or Kiss My Ass which would be more appropriate.

disabledvet's picture

GREAT!  "What do you do for an encore" moment.  I can hardly wait...