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The Collateral Shortage Is Back, With A Twist
The last time the Treasury market saw a 2 year high surge in fails to deliver (approaching $130 billion), about a month ago, there was a furious shortage of Treasury collateral represented by a surge in "specialness" of 10 Year paper, which traded around the -3% fails penalty rate in repo indicative of collateral "desperation." This followed the hammering that the 10 year and especially the belly experienced, leading to a shorting scramble, and leading to the near record special rates. Then, following last month's 10 year 912828VB3 reopening, things normalized, as the Primary Dealers were allocated some $7.7 billion in 10 Year paper to satisfy margining requests.
Today, as per the latest ICAP data, the collateral shortage is back on, with the 10 Year moving from -0.10% in repo yesterday to 0.85% ahead of Wednesday's second re-re-opening of 912828VB3. But what is more curious is the repo shift, because while the On The Run shortage was to be expected with the 10 Year getting pounded to 2.75% on Friday, it was the 3 Year that saw a plunge in repo, with the repo rate soaring from -0.13% to -1.45%: ostensibly the widest it has been in our records database.
In other words, the collateral shortage just ahead of the 3 and 10 Year auctions is back and while the shortage of the 10Y OTR is somewhat more manageable than last month, it is the 3 Year, or the short-end, that is now in very short inventory supply.
Will this situation improve once again following tomorrow's and Wednesday's 3 and 10 Year auctions, or is the collateral shortage becoming a structural issue in what was once the world's most liquid market, at least until Bernanke came along, tune in two days to find out.
One thing is certain: with the Fed continuing to monetize ever more 10 Year equivalents across the curve until such time as it owns 40% of the entire bond market by the end of 2013, 50% in 2014, and so on, collateral shortages will increasingly become the norm, just as the TBAC warned two months ago.
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tyler,
bond guys have a clearer perspective.....(ie rick santelli)........you are clearly from the pits
i read every word when you talk about specific bond situations
a prerequisite for any tbtf position should be 5 years in the bond pit
thought provoking to be sure. QE is new and so is the unwind. i think we've got a "WOPR" problem and ye old "just unplug the damn thing" isn't quite how this game is played. one very large issue pressuring rates is the fact that the deficit is coming down quite spectacularly. this probably seems "backwards" to most people (less supply should equal more demand...right?) but since we're in a special situation i think the temptation to taper is quite large and people simply don't understand just what's been going on the last four years and how it's "distorted" capital markets. clearly something had to be done...some of the bubble activity was just ridiculous. having said that "it didn't take much to initiate operation Over Kill" either.
Wish I understood what the fuck all this repo collateral talk meant. If I did, maybe I could panic appropriately.
I love this. Print currency each day. Truly, make it up.
Now pretend it has value so people will want it and you can lend it out.
Get people to borrow your "made up" money.
The more "made up" money you own the more you can loan out. (So you need "collateral" which is a fancy word for owning shit. Repo collateral is where the owner of the shit borrows by using their shit to convince someone they might possibly be able to pay back the loan at some point -- or else the someone making the loan can take the shit. Only the borrower doesn't really have the shit so the lender doesn't get shit. Get it?)
Here's the really cool part. The part where you turn your made up printed greenbacks into real stuff. Ready?
OK, now make people agree when they borrow to pay back what they borrowed, plus interest -- that is, people have to give you part of the value of their work.
And if they can't pay you back then take their stuff. Real stuff, like land and businesses and toll roads and shit.
Got it? Good, 'cause next time we'll talk about the business cycle.
Got it, thanks
Wow! You got great material and a delivery worthy of Carlin.
If there is a shortage of treasuries, shouldn't the price rise (and yields fall)? This market gets wackier every day.
http://dareconomics.wordpress.com/2013/07/08/around-the-globe-07-08-13/
It would in the old normal, when the key driving force behind markets and shadow banking was not the $70 trillion State Street-BoNY-JPM repo/collateral pool.
It has been especially difficult to learn economics in this bizarro environment.
Personally, I can't imagine a better teacher of economics than this "bizarro environment".
Consequences...
Yeah, yeah, yeah, yeah and with the taper talk they say the world's going to be innundated with Treasuries.
LOL
in fact that could happen. there are a lot of moving parts here and we are talking paper not gold...so it's unclear how this "bucky ball" called "unwind" really shakes out. the easiest thing to have done is to have simply continued the program until you start generating massive surpluses. believe it or not spending it down at the Federal level in a spectacular way. of course it also looks like Obamacare is dead as well. no employer mandate? spectacular failure! if the individual mandate gets toasted then you can say goodbye to the Affordabe Care Act.
"of course it also looks like Obamacare is dead as well"
Is that how it looks from where you're sitting? Looks a bit different to me. From where I'm sitting it's a spectacular success in government takeover. To wit:
1. Employer mandate: gone. Why would Obama want employers offering insurance when the goal is to drive as many people into government exchanges as possible en route to the single-payer system he has stated he prefers on multiple occasions? He's practically telling employers "walk away from this."
2. Requirement to verify income and employer insurance offerings to qualify for a government-subsidized health insurance policy: gone as of this morning by His Lordship's decree. Everyone going to the exchanges gets a government-subsidized health plan just on their say-so (illegals, too).
3. If you can't even afford that, there's no need to buy one at all. There will be no penalties assessed for failing to have coverage. They can't access employer records to verify for subsidy, they also can't access them to verify for the penalty. Just claim you have coverage "somewhere" and you don't pay the fine.
This is what they call a win-win in DC. Obama is having his "Mission Accomplished" banners being printed up as we speak.
There is not going to be an unwind or a taper because there cannot be.
Rates cannot be allowed to rise for long because that crushes the government's budget with interest payments. They are stuck in a Catch 22 from which there will be no exit.
If rates rise, housing tanks and housing is the only driver left in this economy. If rates rise government interest payements will swamp the budget in short order. If rates rise economic "growth" stalls killing gov revenues.
So figure it out. There will bever be a taper or a Fed exit because there cannot be. We have reached debt saturation and the only course of action in such a scenario is currency debasement and then it will be over.
so the downside of the collateral crunch is the dow only goes up 70 instead of 150.
exactly. "with 150 still looking good actually." the treasury shorts (i know one very well) are all rocking out this week like it's 1999...even though they missed that rally too. i'm not so sure i'd be breaking out the bubbly just yet.
And GOFO is negative. If you borrow money using gold as collateral, they pay you interest. Interesting times.
Call Suzie Orman!
I'd be suspicious if somebody wanted to PAY me to borrow money, as to whether I'd ever see my collateral again.
liquidity is like oxygen....you don't realize how important it is until you don't have it
Not to worry. The HFT guys supply plenty of liquidity to the "market".
Some of them are going to lose their two second head-start, perhaps.
http://qz.com/101387/thomson-reuters-will-stop-giving-high-speed-traders...
They are behind proxies and dummy web fronts already as part of the common security practice for most of the agencies that do HFT stuff. (Can't hit what you can't see or know what's real). It's a cheap way to confuse an attack and easy to setup.
Beside if they are getting a direct feed and not hiding all their crap behind a network Air Gap and shuttling traffic. If it was built right. Shouldn't slow them down a bit.
However since most of the places are run on lowest bid and lowest expectation, it should go down faster than a two dollar hooker. They are there to make money, not do their IT properly.
Almost irrelevant. The real insiders have the info at least a day in advance, sometimes much longer. HFTs are the bottom-feeders in the information war. The real insiders get a lot more advanced notice. For example: Fed announcements that were sent to various governors and senators so they could harmonize their message with the announcement that was about to be made (article on ZH about it months back).
But Spain and Greece are producing quality collateral quickly.
There will be major forces pushing up the US dollar. Especially with the coming defaults/write downs in non collaterlized and junk debt.
This is how it starts.
the penalty for fails is a joke. the ficc is a joke. the bond market is a joke. the fed is a joke. the dollar is a joke. the gubbermint is a joke. not a very good one either.
It won't be bad until someone snatches up the dead cats as collateral.
fail to deliver on dead cats is only 1.13% annually.
All the idiots are buying more paper promises. Brilliant.
Need treasuries? I bet the Chinese and Japanese could sell you some.
If collateral is multiple hypothecated then a mark to market collateral call on collateral backed positions is also multiplied. A loss on the position can generate a call to increase collateral (margin call) or a loss in market value of the collateral can do the same.
When I started in the business I worked for a boutique firm that did structured finance private placements--basically collateralized loans (repurchase agrreements to be exact). Our niche was that we could deliver a legal opinion that the lender had a perfected security interest in the collateral -- ie. the lender truly owned it and if the counter party defaulted, the lander could liquidate the collateral without any court action. The street repo at that time could not support such an opinion. Our agreement was 7 pages long, the street repo was about 45 pages long--legal fog and bullshit behind which collateral was re-hypothecated. It's really a variation on the "segregated assets" scam. This is the very essence of the fractional reserve banking game, so it's not surprising it happens.
collateral problems? sell some of that gold that is buried accross this country that they claim to have and take care of some debt! lying bastards!
Damn, if only there were some way, any way, to create more treasuries for collateral purposes - you know, the same way gold is created out of thin air to provide liquidity in the markets? Too bad there's no way to do that with Treasuries.
Wait! I have an idea! What if the Government BORROWED some more? - you know, for the good of the nation and really the global financial system. I know they probably don't like the idea, but that really seems like the only way to provide the market with the good collateral its so desperately in need of right now.
bond market collapse is expected and nobody wants to be a bag holder. so banks have The cash and fed the bonds. but when the whole financial system is built on repos this situation is very interesting.
Big short term squeeze coming on Treasury shorts. Bernank has to keep up the window dressing. capital requirements raisd today on the banks. Should be good to send them into market for treasuries.
I've got this bridge in brooklin, Its a AAA+ rated asset.
Though sold several times now, It can be rehypothecated x10.
P.S. not only is It rated Aaa+ It generates revenue.
Such a deal!