The Current Repo Fails Issue Rebukes Any Notion That The Fed Is In Control

Tyler Durden's picture

As we have discussed at length, the issue of the surge in Treasury fails (and the Fed's panicked "sell your bonds" response) suggests things are far less 'stable' than they would like the world to believe. Simply put, "Repo Matters" as Alhambra's Jeffrey Snyder discusses below:

The current repo fails problem “directly rebukes” the idea that the Fed has “all possible scenarios covered.”

  • For the Fed to have all scenarios covered would mean that the NY Fed’s SOMA portfolio has to maintain a “broad enough inventory” to satisfy the market
  • “That, on its face, is a patently unrealistic assumption since it will be impossible to predict exactly what repo markets need in even the immediate future, let alone during any drawn out ‘normalization’”
  • Recent spike in repo fails is important because RRP is supposed to “directly alleviate a collateral shortage of this kind”
  • To lose control of short-term rates during an anomaly would be “potentially dangerous” especially if it were to take place during “normalization, where instability would be beyond elevated”
  • Where the Fed failed to “enforce a floor during the worst days of panic in 2008 and into 2009” there is “much confidence here that flaws have been found and addressed positively”

The question for financial participants is whether or not a less solid and shrinking repo market is unrelated to continuous and orderly function. History suggests, decidedly, it is not.

For central banks, it seems to follow that they are content, at least outwardly, to simply manage expectations with the idea that will be enough to create and maintain “resiliency.”


By persisting with the PR campaign that the world is fixed and close to attaining near-perfection that is supposed to be enough to offset very real weakness in liquidity and emergency balance sheet capacity? Then again, if you actually believe that of the economy and markets then the chances for a financial “shock” are probably trivial in your estimation. But it pays to remember that last year’s bond selloff was also “unexpected” as well.


It’s not exactly the idea of currency elasticity imagined when the Fed was first dreamed up, but then again that function was also mostly PR.

As Snyder concludes,

The FOMC wants, actually needs, to instill confidence that it can transform itself from its QE legacy (however much tarnished it has grown). This only heightens the idea that stability is a paperlike illusion that may be undone with only the slightest “shock” or disruption – the hidden asymmetry that is the hallmark of fragility. This severely, in my opinion, undermines the credibility of even the idea of the rate floor.

* * *

The Fed's market domination has meant massive collateral shortages (as we have detailed previously) and now more even that during last year's taper-tantrum, the repo market is trouble.

*  *  *

But why do I care about some archaic money-market malarkey? Simple, Without collateral to fund repo, there is no repo; without repo, there is no leveraged positioning in financial markets; without leverage and the constant hypothecation there is nothing to maintain the stock market's exuberance (as we are already seeing in JPY and bonds).

Crucially, it should be inherently obvious to everyone that the moves we see in the stock market is not about mom and pop choosing to invest in the stock market (or not) as the 'cash on the slidelines' fallacy is "completely idiotic' but about the marginal leveraged machine (or human) quickly jumping oin momentum.

The spike in "fails to deliver" highlights a major growing problem in the repo markets that provide that leverage... and thus the glue that holds stock markets together.

Wondering why JPY and bond yields have diverged so notably from stocks in recent days... repo effects (it's just a matter of time before it hits stocks)...


And while the world breathlessly ignores it because stocks are going up for now, here's what it meant in 2009:

“If you have fails, then the market isn’t functioning properly,” said Eric Liverance, head of derivatives strategy at UBS AG in Stamford, Connecticut, another primary dealer. “That is what we saw last fall when we had massive fails. If you can lend a bond out and count on it coming back the next day, then those are properly functioning markets and it enhances liquidity.”


“That is telling you that dealers really don’t know what all this will mean,”


“People are being prudent and saying I am not going to have a Treasury short now and I’ll wait to see how this pans out over the next two months.”


“The market’s heightened state of anxiety looks likely to produce unintended and unfortunate consequences,” said Ciaran O’Hagan, the Paris-based head of fixed-income at Societe Generale. “The fails penalty adds to the security of the market at the cost of liquidity. All this suggests that liquidity will be hurt across the board for U.S. Treasuries.”

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Ham-bone's picture

Fed will do "whatever it takes"...even if it takes more and more with less and less return

NotApplicable's picture

What's so hard about juggling hand-grenades?

Headbanger's picture

How the hell could the Fed ever be considered "in control" when they got us into this mess in the first place!!??


BTW:  Check out Boehner slamming Obozo today:

graneros's picture

Yea  around 3 months til election time.  He's gotta look like he stands for something.  Bohner complains Obama has been there 5.5 years and doesn't take responsibility? Very true Mr. Speaker.  You've been speaker of the House for almost 4 years and have been one of the most, if not THE most, ineffective Speaker ever. So yea come on strong before the election and make beleive you've got a pair.

ObamaDepression's picture

To be fair, about 200 bills have been passed in the House. Harry Reid controls the senate and hasn't allowed votes on any of the bills.

JR's picture

The point is every single penny in the federal budget, including the full monty welfare - Obamacare and the extra spending that the White House does for its Welfare State projects - has passed the House of Representatives with substantial Republican support.

IOW, in the end, rather than force a shutdown of the government the Republicans, ignoring their power of the purse, gave the Democrats and the media what they wanted.

So for Boehner to criticize Obama for not being responsible for his actions is the height of hypocrisy - because Boehner is leading a substantial majority of the Republican Party in the House and he refuses to stop the Welfare State from its incredible expansion.

And, make no mistake, some of those bills that passed in the House are paying for the costs that accompany an open border. Every time one of those planes takes off to take a Guatemalan youngster to join a family in the US, the House is paying for it - every stupid penny of it.

Colonel Klink's picture

It's easy, as long as the pins are in.

max2205's picture

Print here or in Belgium what difference does it make

NoDebt's picture

The faster we can get people the lose this insane faith in the Fed, the better.

Nobody wants to hear anything other than "government guaranteed" these days.  That needs to be be broken in a very visceral, very public way.  (Or nothing will change in our lifetimes or our childrens' lifetimes.)

Odds of this happening?  Don't know.  I suspect it's in the low single digits.  Maybe with a decimal point in front of it.


Tasty Sandwich's picture

Most people like to think that someone or thing is in charge and control, even if that control is just an illusion.

If it wasn't the Fed, it'd be some other institution.

It's possible that the system has already completely broken down and we just don't know it yet.

NoDebt's picture

"If it wasn't the Fed, it'd be some other institution."

I'll take my chances.  Thanks just the same.

Tasty Sandwich's picture

Same as it ever was, as LawsofPhysics would say.

Totentänzerlied's picture

I'll assume you're referring to people in the economics and financial worlds, cause virtually no one else has even heard of the Fed, let alone has any idea what it does or claims to do.

The way it works is, for every good thing that happens, the Fed can take as much credit as it wants, while for every bad thing that happens, the Fed can refuse all blame. Current "faith" in the Fed is something like Stockholm Syndrome, availability heuristic, confirmation bias. Very few prefer to believe that the Fed is inept and/or corrupt and/or destructive, and the Fed is the only game in town. So you've got a choice between a naturally highly unattractive belief and a comforting belief that "everyone" seems to share and which is not, alas, obviously and intuitively absurd or false.

Having faith in the Fed is simply the path of least resistance (both naturally and by design). To break that faith, you need some motivation to reconsider one's beliefs (say a market crash), plus some easily comprehended reason as to how and why it's the Fed's fault. Problem is, people are ridiculously credulous and forgiving when the alternative is realizing your beliefs are false and reality is scarier than you think - admitting you are wrong, especially to oneself, is the last thing humans want to do. There is a natural hierarchy of scapegoats, and we have not nearly finished traversing it - fatfingers, short-sellers, speculators, CEOs, investment banks, consumer "thrift", China, HFT, the weather, etc., etc. ad absurdum.

It's not really even faith, it's a mix of apathy (due to real and perceived powerlessness), hope(tm), and normality bias.

So I agree, the odds are quite low, and forgive me for not holding my breath.

Youri Carma's picture

Bond Anxiety in $1.6 Trillion Repo Market as Failures Soar
7 July 2014, by Liz Capo McCormick (Bloomberg)


Now, more repo trades are going uncompleted, or failing, because it’s either too difficult or expensive for the borrower to obtain and deliver Treasuries.

Such failures to deliver Treasuries have averaged $65.6 billion a week this year, reaching as much as $197.6 billion in the week ended June 18, Fed data show.

Uncompleted trades averaged $51.6 billion in 2013, and $28.8 billion in 2012, according to the Fed.

In those cases, the borrower pays a 3% penalty.

buzzsaw99's picture

People are being prudent and saying I am not going to have a Treasury short now and I’ll wait to see how this pans out over the next two months...


What do you think is going on here? You think you can come to my bond market casino and take over? I talked to Barzini (the fed) - I can make a deal with him, and still keep my zirp 4evah! [/Moe Greene]

graneros's picture

Better invest in some bullet proof glasses there Moe.

Eyeroller's picture

Muppets will always BTD at the beginning of a pullback/correction/crash.

No surprises with what happened today.

But if we are at the beginning of a significant pullback, then BTD will give way to panic.

The panic this time will be huge, seeing that muppets have been so complacent with the FED's ability to protect them.

GooseShtepping Moron's picture

That's an interesting observation there. So the real correction begins with the anomalous Dip That is not Bought (which I believe is also the title of an old Sir Arthur Conan Doyle story), and this nondescript event is like the slipping of small stones that starts the avalanche? I suppose that, from a technical standpoint, you cold say that that's how all corrections begin, but in a long-running BTFD market the very idea seems imbued with extra significance. I can just imagine the cloud of apprehension that will spread over the traders' faces as they realize, for the first time in recent memory, that no one's buying this one.

And just because I couldn't resist...SOMA sema.

max2205's picture

No. They buy the dip till the margin calls come in and then you get dumping then panic

NOTaREALmerican's picture

Well,  in a world where all the information is known and all the participants are rational actors,  I'm sure anything is possible.

economessed's picture

We spent the last 30+ years educating an entire generation how to extract wealth from our economy through the application of ever more complex financial arrangements.

But all this added complexity didn't produce any real, tangible value.  It's a fiscal Jenga pile, and now we need the wood.  We don't have the luxury of time to unbuild this in an orderly way -- to re-establish the relationship between human productivity and the value of money.

And so the Fed will act astonished when the greed-fueled architects of this mess grab the easy-to-reach wood out of the bottom of the financial Jenga pile.

world_debt_slave's picture

makes me wanna' puke

FieldingMellish's picture

Cynical. Repo failures are a sign of hope and change. Everyday, the government wants to help you.

Notsobadwlad's picture

The Fed, like America must be destroyed for the global government to rescue the people ... It is al planned. It is all a false flag.

WTFUD's picture

I've heard that Benny B looks 5 years younger and has a much greater zest for life since he let go the reins ( the $250k speaking engagements help ) whereas Mr Yellen's menstruation cycles are totally fucked up.