Record $189 Billion Injected Into Market From "Window Dressing" Reverse Repo Unwind

Tyler Durden's picture




 

When we reported yesterday's record reverse-repo surge, driven entirely by collateral-strapped financial entities scrambling to "window dress" their balance sheets with rented Fed-owned Treasurys for regulatory purposes, we said "Expect total reverse repo usage tomorrow to plunge by at least $150 billion as the banks will have fooled their regulator, which also happens to be the Fed, that they are safe and sound. Rinse, repeat, until the entire financial system collapses once again and people will ask "how anyone could have possibly foreseen this." Moments ago the Fed reported the daily reverse repo use. It turns out we were optimistic: it wasn't $150 billion, it was $189 billion. Following yesterday's $339 billion allottment, today this number tumbled to just $151 billion, meaing nearly $200 billion in fungible cash had to quick find a new home away from the Fed.

Which, incidentally explains where the relentless buying in today's market is coming from: today the Fed just released liquidity for two months worth of POMO in one day - money which promptly had to find a parking spot until the next quarter end when the same window dressing exercise is repeated and which will continue to go on completely unnoticed by regulators.

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Tue, 07/01/2014 - 13:32 | 4914387 NotApplicable
NotApplicable's picture

Fuckin' magic, I tell ya!

So... how many more quarters until we get a trillion dollar reverse-repo? 8?

Tue, 07/01/2014 - 13:50 | 4914458 RaceToTheBottom
RaceToTheBottom's picture

Volatility is a thing of the past....

Something for uncivilized societies, not ours....

Tue, 07/01/2014 - 14:04 | 4914510 Cthonic
Cthonic's picture

Is that why I suddenly cannot short any XIV?  Or is it just my shitty broker?

Tue, 07/01/2014 - 16:34 | 4915065 Duffminster
Duffminster's picture

I am confused.  I thought reverse repot operations take liquidity out of the system.  In a reverse repo the Fed sells a security and takes cash.  So how would this drive stock prices up?  You mentioned in previous articles that POMO is starting to dry up.  Can you please provide some elucidation on how the actions of yesterday would account for the large spike in the market?

Thanks,

Completely confused,

Duffminster

Tue, 07/01/2014 - 13:33 | 4914391 FieldingMellish
FieldingMellish's picture

I am sure this is having a stabilizing effect on the markets... and no unintended consequences either...

Tue, 07/01/2014 - 13:33 | 4914398 CharliePrince
CharliePrince's picture

so this is bullish   yes?

 

sarc

Tue, 07/01/2014 - 13:34 | 4914405 alien-IQ
alien-IQ's picture

isn't everything?

Tue, 07/01/2014 - 13:36 | 4914417 fonzannoon
fonzannoon's picture

there is such massive demand for UST's that the fed needs to lend them out to banks before they audit them to make sure they own a sufficient amount of collateral (UST's). see...all good.

Tue, 07/01/2014 - 13:41 | 4914426 LawsofPhysics
LawsofPhysics's picture

This is my take as well.  The demand for and shortage of "good collateral".  Same as it ever was, until it isn't.

Tue, 07/01/2014 - 13:45 | 4914446 fonzannoon
fonzannoon's picture

Same as it ever was, until it isn't. Unless somehow it is, same as it ever was/is. 

All I know is the you have the Nikkei, Yen, the JGB market and Crude as your canaries. Assuming we actually had time to pivot should things go the other way, which I don't think we would...I am looking at those 4 things as the indicators that something is going wrong.

Tue, 07/01/2014 - 13:47 | 4914451 Dr. Engali
Dr. Engali's picture

Crude is what will kill it. Everything else can be manipulated through central bank coordination.

Tue, 07/01/2014 - 13:51 | 4914466 fonzannoon
fonzannoon's picture

agreed. If it was any of the other 3 that means the banks turned on each other. 

I do wish ZH would start putting up a death watch on this guy....even if just to pass the time...

http://finance.yahoo.com/q/bc?s=DB+Basic+Chart&t=1y

Tue, 07/01/2014 - 13:54 | 4914476 Dr. Engali
Dr. Engali's picture

Been watching that one too. It's actually the top stock on my screen.

Tue, 07/01/2014 - 15:38 | 4914871 gatorengineer
gatorengineer's picture

Well not sure there is a canary..... Crude certainly isnt it.  It can be manipulated rather easily by the volume (coverage) of the unrest in the world.  Its artificially parked right now.  Based on Geopolitics it should be north of $120 a barrel, and based on economic outlook under $95....

 

10 year under 2.40...... would be a sign for me, as well as the SSE breaking 2k, the wrong way. Gold getting to 1400 would also be a turning point.......

Tue, 07/01/2014 - 13:50 | 4914462 youngman
youngman's picture

It is if you are the guy in charge of those key strokes....he has some power

Tue, 07/01/2014 - 13:34 | 4914403 alien-IQ
alien-IQ's picture

but I thought the market was rocketing up because the economy was doing great?

Tue, 07/01/2014 - 13:35 | 4914406 Dr. Engali
Dr. Engali's picture

What we are witnessing here is the death of a currency.

Tue, 07/01/2014 - 15:40 | 4914881 gatorengineer
gatorengineer's picture

What we are witnessing is the death of Fiat, not a currency, big difference......  We are in the trading range against all other currencies.  The RMB is much more fucked than the dollar by the way.

Tue, 07/01/2014 - 13:35 | 4914409 PlusTic
PlusTic's picture

more fukking rigging...it's never gunna end

Tue, 07/01/2014 - 13:36 | 4914412 dr.charlemagne
dr.charlemagne's picture

i never really feel like i understand the utility of this repo/reverse repo stuff which apparently dominates the financial underpinnings of the entire world. My guess is that its hard to understand because its pure BS which serves only to obfuscate the fraud further and confuse those who expect that the system is fundamentally honest.

Tue, 07/01/2014 - 13:44 | 4914442 Dr. Engali
Dr. Engali's picture

Think of it this way. The fed is buying up the bulk of the treasury issuance creating a shortage of collateral. At the end of the quarter entities in need of collateral 'borrow' them from the fed in order to meet those collateral obligations and then once they report their numbers they return them to the fed. In other words... It's pure BS to obfuscate the fraud.

Tue, 07/01/2014 - 15:42 | 4914887 gatorengineer
gatorengineer's picture

heres what I dont understand, to borrow Tbills, what do they post as collateral, or ar the lines unsecured?

Tue, 07/01/2014 - 17:07 | 4915167 Duffminster
Duffminster's picture

Thanks.  Yeah, but how does this correlate with the pump in the market today if at all?  I'm arguing with people over at CNBC and their saying that reverse repo's remove liquidity, which should make stocks go down?

Tue, 07/01/2014 - 13:38 | 4914421 LawsofPhysics
LawsofPhysics's picture

The "repo" market has been around since 1917.  The reverse repo is somewhat newer, but the question still stands, what will actually stop this or cause it to blow up? 

Seriously, what's the god damn trade here?

Tue, 07/01/2014 - 13:44 | 4914438 LawsofPhysics
LawsofPhysics's picture

LOL, well yes, aside from the "obvious".

Tue, 07/01/2014 - 13:47 | 4914452 fonzannoon
fonzannoon's picture

But isn't that the most amazing thing about all this LOP? That we are all looking for the trade other than the obvious? I swear at some point Yellen is going to cause a disruption because she is going to lose it and start screaming "JFC just get in the fucking SPY already and stop scratching your heads and balls in confusion! I'm  looking at you pension funds!!!"

Tue, 07/01/2014 - 13:51 | 4914461 Dr. Engali
Dr. Engali's picture

You can go long Gopro, and if the trade goes wrong you can always snap a photo of your screen when it drops to zero. Should be a good keepsake.

Tue, 07/01/2014 - 13:57 | 4914482 LawsofPhysics
LawsofPhysics's picture

At least people actually pay for their GoPro, unlike their Facebook accounts.  GoPro is up, time to sell.

Tue, 07/01/2014 - 13:48 | 4914455 madbraz
madbraz's picture

Need to ask the trading desk of the NY FED - the largest trading desk ever assembled by any central bank, the largest team of "research analysts, the largest number of economists ever assembled...

 

WTF do they need all this?  just guarantee 10% annual return to all risk (bag) holders and close shop.

Tue, 07/01/2014 - 13:49 | 4914460 fonzannoon
fonzannoon's picture

That is the plan.

Tue, 07/01/2014 - 13:40 | 4914424 Kaiser Sousa
Tue, 07/01/2014 - 13:44 | 4914435 madbraz
madbraz's picture

what a corrupt, shyster organization

Tue, 07/01/2014 - 13:45 | 4914436 Temporalist
Temporalist's picture

I thought some would get a kick out of this:

Security Detail for Fed Chairwoman Irks Neighbors

Residents in Gated Community Say Commotion Surrounding Yellen Is Disrupting Neighborhood

"Neighbors seem especially put off by the aesthetics of the security detail, in particular their blue uniforms and—in the words of one resident—"doughnut bellies.""

http://online.wsj.com/articles/yellen-s-security-detail-irks-neighbors-1...

Tue, 07/01/2014 - 13:45 | 4914449 JRobby
JRobby's picture

Q2 Balance Sheet fix is in. Kick the can down the road. Q3 should easily exceed $220b (seasonally adjusted of course)

Fuckwids

Tue, 07/01/2014 - 13:49 | 4914459 IANAE
IANAE's picture

Does anyone have longer term chart of repo volume to post here?

Tue, 07/01/2014 - 13:58 | 4914484 Dr. Engali
Dr. Engali's picture

No, the reverse repo window just opened last year.

Tue, 07/01/2014 - 14:16 | 4914533 LawsofPhysics
LawsofPhysics's picture

Yes, facilitating the ability of the TBTF banks to purchase equities.

Tue, 07/01/2014 - 13:55 | 4914478 Soul Glow
Soul Glow's picture

And what are the Majors doing with the cash?  Buying equities.

Ain't life grand, Janet?

Tue, 07/01/2014 - 14:03 | 4914505 DavidC
DavidC's picture

Something that confuses me. If the Fed is lending treasuries to the banks to window dress for the end of quarter, surely that pulls OUT money/liquidity. So how was the market up yesterday for the month end?

I can sort of understand it today if money/liquidity has been given back to the banks et al.

DavidC

Tue, 07/01/2014 - 17:29 | 4915240 Duffminster
Duffminster's picture

I have the same question.  When you make a claim like this, it would be helpful to explain it in some detail.  So far the claim is counter-intuitive to me.

Tue, 07/01/2014 - 14:11 | 4914525 IANAE
IANAE's picture

Related...ignoring that reverse repo is relatively new, what were banks using to window dress in 2007-2008, and what do those figures look like consolidated with reverse repo volume?

Tue, 07/01/2014 - 17:40 | 4915286 Greenskeeper_Carl
Greenskeeper_Carl's picture

I'm sure others can explain this a lot better, but I think it's been done as an intentionally confusing gimmick to try to kick the can a while longer. The closer the wheels get to coming off, the more creative they have to get. Just like every time inflation starts to hear up a little, they just change the way it's calculated. And when unemployment numbers aren't dropping like their predictions say they should, they find new ways to not count jobless people as 'unemployed'. Same sort of con job, this one just makes insolvent banks appear solvent. It works until it doesn't.

Tue, 07/01/2014 - 14:26 | 4914567 Save_America1st
Save_America1st's picture

The Tylers called it.  You guys are getting way too good at this.  In fact, you're getting so good, that you all may want to think about staying away from flying, the tops of tall buildings, bridges, and nail guns.  Just sayin'...

Tue, 07/01/2014 - 14:26 | 4914568 OC Sure
OC Sure's picture

This is an interesting subject.

After studying the link in yesterday's post of the IMF whitepaper and then to the link of the orignal Gagnon/Sack proposal to bastardize the fedfunds rate by allowing for the RRP rate to become a target Federal Reserve rate that sets all others, then it becomes clear that the aim is to collateralize the excess reserves from QE as RRPs. Collateralizing them would then enable them to rehypothecated by Hedge Funds. The other variable involved is to see more RRPs being done as term instead of overnight.

This is going to be a very hot topic for the gods of counterfeit as it enables them to widen their smoke screen.

Tue, 07/01/2014 - 14:48 | 4914621 Yen Cross
Yen Cross's picture

     Here's a very simple 2.5 minute tutorial on reverse repo's for anyone that doesn't understand how they work.

A Fed explainer: What's Reverse Repo? | Marketplace.org

Tue, 07/01/2014 - 17:03 | 4915148 Duffminster
Duffminster's picture

I am confused.  I thought reverse repot operations take liquidity out of the system.  In a reverse repo the Fed sells a security and takes cash.  So how would this drive stock prices up?  You mentioned in previous articles that POMO is starting to dry up.  Can you please provide some elucidation on how the actions of yesterday would account for the large spike in the market?

Thanks,

Completely confused,

Duffminster

Tue, 07/01/2014 - 17:23 | 4915221 Yen Cross
Yen Cross's picture

  Reverse REPOs do take liquidity out of the banking side of the system. Banks borrow bonds from the Fed. s/t and the Fed. pays them interest, or buys them back at a higher price.

   The banks have capital requirements that liquid cash doesn't qualify for, so they borrow the cash equivalent in bonds to meet those requirements. When the banks didn't sell all the collateral(bonds/treasuries) back to the Fed. today the excess cash went into the markets.

Tue, 07/01/2014 - 19:05 | 4915592 Duffminster
Duffminster's picture

A pretty smart guy posting in comments on CNBC said this:

"...Repo has nothing to do with reporting requirements. read the NYFed link I gave you. reverse repo is currently just being tested; it's purpose ultimately is to suck up liquidity. cash is an asset which can be used to meet capital requirement; trading cash for bonds does not improve a capital requirements showing.

Since the holder of cash hands the cash to the Fed it is not an injection of cash into any market; it is effectively taken out of circulation because the Fed can take it out of circulation. This is a way the Fed can unwind its balance sheet...."

 

Can someone tell me if he is correct or are he and I both missing something?

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