General Collateral Friendo'd As Bill Battering Finally Slams Repo

Tyler Durden's picture

As we first pointed out, yesterday's stunning, near-failure in the 4-Week Bill auction, was the straw that broke the illusion of the market stability's back and as even Goldman pointed out, led to the first true "fear-driven" drop in stocks. Today, things are getting from bad to worse, as it is not the Halloween Bill, but the October 17 issue that is getting Friendo'ed as can be seen on the chart below - the 10/17s just hit 42 bps, a nearly 20 bps move in minutes!

But while disturbing, what is going on in cash is just the beginning of the story. It is the events shadow funding markets that could really light the fuse on fire.

Recall that in our post from Monday "With A Looming Debt Ceiling X-Date And Still No Deal, Here Is Another Trade Idea", we said:

Repo investors [will] begin to focus on the underlying collateral and start to make a distinction between debt that is most subject to payment delay and paper that is not. The result would be that as cash leaves the funding market, "the financing rate on all Treasury collateral – regardless of its maturity cycle – will rise." Indeed, during the last debt crisis in the summer of 2011, Overnight repo soared from 1 bps to 28 bps in the span of a few weeks. It is this trade that may once again generate substantial alpha for those who wish to bet on continued Congressional dysfunction because the October US Treasury repo future is currently trading at an implied yield of just over 11bp, having cheapened by more than 3bp since September 23. "Depending on how quickly the debt ceiling is raised, we expect this implied yield could move higher ahead of October 17"

In other words, in addition to another very profitable pre-debt ceiling trade (repo yields are spiking) alongside our other prior recommendation that has generated epic alpha in ten short days, it was only a matter of time before the surge in cash yields moved to the repo market. That time is today.

According to some, the main reason for the crush in 10/17 Bills is that this is the first issue to no longer be accepted as collateral by repo desks. Which means the cash contagion has finally spread to Repo. Sure enough, Stone McCarthy confirmed just that:

The Fed funds rate again opened at 0.10% this morning. Prior to today, it had traded at 0.09% early every morning since September 9th except for last Monday ahead of quarter-end. Yesterday's Fed funds effective rate was 0.08%. It was 0.06% last Monday for quarter-end, but outside of that it has held between 0.07% and 0.09% since June 18th. The overnight GC rate jumped this morning to 0.15%, which is above even where it was for quarter-end. It is the highest the early morning GC rate has been since June 28th.

And of course, unless this waterfall contagion is stopped, next up come money-markets, broader repo markets, and ultimately a Lehman-like Ice-9 freeze as contagion grasps the entire shadow funding market at precisely the worst time possible. Will this happen: we don't know. We do know, that with every day that the debt ceiling remains unresolved, the possibility of such an Ice-9 outcome becomes exponentially greater.

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LawsofPhysics's picture

Wait what?  According to our mark to fantasy  accounting we have plenty of collateral!


Jamie Dimon

hedgeless_horseman's picture



Pfffttt.  European banks don't need collateral, or reserves, only borrowers do.

To reduce the reserve ratio, which is currently 2%, to 1% as of the reserve maintenance period starting on 18 January 2012. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions.

Arius's picture

what can we do to stop this contagion?

hedgeless_horseman's picture



Don't worry about contagion. FASB, The Fed, Brian Moynihan, and his calvacade of magical bank CEOs have it all under control.

Arius's picture

on a horse ?  may be its just me, but when i see one i look for the other 3 ...

i know you try to calm me down and thanks, but it seems it made it worse :)

hedgeless_horseman's picture



Repo investors [will] begin to focus on the underlying collateral and start to make a distinction between debt that is most subject to payment delay and paper that is not. The result would be that as cash leaves the funding market, "the financing rate on all Treasury collateral – regardless of its maturity cycle – will rise."

As long as nobody wanted to actually see the gold and silver allegedly backing the bank's notes, in the Old West, everything was fine. 

Cognitive Dissonance's picture

CONfidence often times has nothing to do with reality. In fact a dose of reality is almost always in direct opposition to Confidence in the insane asylum.

<When the truth can no longer engender Confidence embrace the lie.>

hedgeless_horseman's picture




For some reason, this old woman felt it necessary to have her photo taken with a metric buttload of collateral, that really isn't collateral anymore.  Is it?  All UK and US sovereign debt is non-recourse. 

It is good to have one's debt denominated in one's own infinite fiat.

So why do the central banks hold gold?

Manthong's picture

I bet you didn't know that old lady can curl 50 lbs.

Guess what's in that black bag.

hedgeless_horseman's picture



Leave FLOTUS out of this.

Manthong's picture

The Amazon of the East Wing can do 80 lbs on each arm.

but back to your last question.."So why do the central banks hold gold?

..because they know that fiat regimes are finite in time and eventually the 5,000 year store of value will return in prominence.

..but you knew that.


imaginalis's picture

"No Country for Gold Ben"

astoriajoe's picture

how much of other countries gold does the U.S. hold to launch its new currency?

Slarti Bartfast's picture

curl 50 lbs

As in curl one out? In which case it's a black colostemy bag perhaps.

cro_maat's picture

Thanks for the softball question Hedgeless. The CBs hold gold so they can manipulate currency prices via the FX market.

Oh and siphon off as much as they can to other crony beneficiaries when a war needs starting or an election fixed. My question is where did all of Yamshita's gold end up?

hedgeless_horseman's picture



I sell portfolio analytic software in a world where all prices are manipulated through collusion or HFT. My days are numbered.

At least you don't sell regulatory and exchange compliance software.  The Honorable Jon Corzine obviated that market.

GOSPLAN HERO's picture

Does unihorse crap Skittles?

OldE_Ant's picture

Add rainbows from diamond eyes and the unicorn shitting skittles...

PP's picture

tyler's picture helps me to recall <NO Country for Old Man>

debtor of last resort's picture

Yep. Waiting for the crash.

AbbeBrel's picture

All sellers and no buyers?   How many elephants can fit through a doorway at once - there may be a new nobel prize winner in there for a new theoretical physics theory - as this might outclass the weight class of economic theory:



You got a alligator mouth an' a hummingbird ass
Your mouth writin' checks that ya ass can't cash
One forty five an' I'm outta ya weight class
Wanna survive? You better scramble like eggs an' break fast

Read more: T.I. - Stand Up - Lyrics | MetroLyrics 

Pladizow's picture
It may not be wise to look into the past for prophets but the three quotes below from the book "The Fourth Turning" are quite prescient. This book was published 16 years ago.
"An impasse over the federal budget reaches a stalemate. The president and Congress both refuse to back down, triggering a near-total government shutdown. The president declares emergency powers. Congress rescinds his authority. Dollar and bond prices plummet. The president threatens to stop Social Security checks. Congress refuses to raise the debt ceiling. Default looms. Wall Street panics."
"History is seasonal, and winter is coming. Like nature's winter, the saecular winter can come early or late. A Fourth Turning can be long and difficult, brief but severe, or (perhaps) mild. But, like winter, it cannot be averted. It must come in its turn."
"The next Fourth Turning is due to begin shortly after the new millennium midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation and empire. Yet this time of trouble will bring seeds of social rebirth. Americans will share a regret about recent mistakes - and a resolute consensus about what to do. The very survival of the nation will feel at stake. Sometime before the year 2025, America will pass through a great gate of history, commensurate with the American Revolution, Civil war, and twin emergencies of the Great Depression and World War II."
The Fourth Turning by William Strauss and Neil Howe published in 1997
Renewable Life's picture

I like this theory and have read some chapters in the book actually, but I question a few things, like;
"It will feel like the very survival of the Nation is at stake", implies it isn't and somehow everything will be reborn bigger and brighter? Sounds a little like religious faith in "American Exceptionalism", and what happens when there is a complete severing with the past, that can't be "reborn"?

Is this theory of the "turnings" thing a European thing, or does it apply to humanity, because Countries are born and die quit often outside of this cyclical generational nature the Author describes?

Manthong's picture

..way older than that .. like Biblical

Maybe the next generation will be more like this..  anything but rap.

Deo vindice's picture

"To every thing there is a season, and a time to every purpose under the heaven:"

Also, (one might add) "A time to repent of the wicked and evil thoughts and ways"

We must not just repudiate the wickedness of the 'other guys', we must each take responsibility for our own actions and understand that moral evil eventually will be judged by God whether in individuals, religions that bear His name, corporations, or governments.

The state of affairs is far beyond tinkering with a couple things here or there in order to repair. It's kind of like bringing in an old jalopy that's rusted through, windows broken out, seats ripped and springs sticking out, tires rotted off - in fact the wheels are missing, transmission gone, and the engine seized, and then telling the mechanic you want a headlight replaced so you can see your way better in the dark.

Putting a new 'headlight' on our problems (the old jalopy) will not enable us to see better in the dark situation we are facing. We need a 'new car'.

Seize Mars's picture

Yeah all the mysterious cyclical prediction thing is cool and all, but it never addresses causation.
It's about debt saturation in a fiat world, with collapse in available repo collateral as an avalanche of IOU's are defaulted upon.
It takes a while I guess. The USA is (was) a big ship. It has taken them a while but she's finally sinking.

Eireann go Brach's picture

Yet the DOW is positive. Move along

marathonman's picture

Point - Disco Inferno! 

Counter-point - This ain't no party!  This ain't no Disco!  This ain't no foolin' around!

youngman's picture

If I was China and Japan I would be selling and fast.....the writing is on the wall...trillions more for years...and less money to buy crap...

Arius's picture

i would advise against it (not that anyone listen to my advise anyway) ... the reason is simple, if they sell the market will crash and the rest of their securities will be worthless.

i know damn if you, damn if you dont but they are big boys

OldE_Ant's picture

You are fucking kidding me.  They should have been selling for the past few years.   Though I'd bet China is fully aware of the UST nuke they have in their arsenal and will play it accordingly at the right time.  Their preverbial ace in the hole.


Cosmicserpent's picture

Oh China has been selling. And buying any real asset that isn't nailed down, such as foreign mines, roads,  foreign manufacturing plants, joint equity, etc. China, unlike the US, is run by patriotic criminals.  We're being run by 7-11 stickup artists.

forwardho's picture

Don't know about the logic "the Chnese will never sell"

At some point it is beter to get 50% back than 0%

And as a side benefit you get to bury your only competition on the world market.

Sounds like a win-win on the big picture.

cro_maat's picture

China is being compensated with cheap gold thanks to the Western banking Cabal. When the gold stops flowing to China they will trade their $1.2 T in Treasuries for natural resources in the U.S.

emersonreturn's picture

cro-maat, i've read this idea many times (china is being compensated with cheap gold thanks to the western banking cabal) and while i certainly can't dispute that gold is cheap thanks to the wbc or that china is gobbling it up...what puzzles me is why jamie and gs and london are giving gold to china at such a great price?  the only explanation i can conceive is they (the wbc) have already arranged with china to move headquarters and sift NA and Europe to colony status.  

SheepDog-One's picture

Mark more garbage to fantasy! I really don't see what the problem is here, get crackin Ol' Yellen!

shermacman's picture

Nonsense. Present Øbama has nominated Janet Yellin. She will be great! You may not have read this, but she will be the first woman to head the Fed! Wait, that didn't come out right.

Dr. Engali's picture

Why is it that all women in a position of power are fugly as sin?

Seasmoke's picture

That chick in Australia looks pretty hot. NO ????

Randoom Thought's picture

Gag ... choke.... spose if you put a bag over her face and unnaturally red (a color that is not found in nature) hair.

moonstears's picture

Wait now, lest we forget, me likee evil but HOT Blythe Masters the silver goddess!

earnulf's picture

No, that CAME out exactly right

Ness.'s picture

Does Yellen have a siblilng we can nominate for a job cause Janet ain't cutting it today (aside from the daily gold smackdown)?



superflex's picture

No, but she has a Mini Me she calls Tripod.