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"Biggest Jump In General Collateral On Record" Leaves Experts Stumped

Tyler Durden's picture




 

While there has been no move in its close cousin, the Fed Funds rate, which actually declined sharply into quarter-end from yesterday's 0.12% print to just 0.03% following a pattern observed in recent quarters when the FF plunges at quarter end just to rebound to its 0.12%-0.13% range...

... it is what is going on in the far more important (in a world in which Fed Funds is irrelevant courtesy of $2.6 trillion in Fed reserves sloshing around) General Collateral rate that has bond market experts such as Stone McCarthy stumped. To wit:

The overnight general collateral rate jumped to 0.38% this morning. The GC rate has seen sharp moves at quarter end in the past, although today's jump is the largest we have on record. We do not have a definitive explanation for today's movement, but if any of our readers have an explanation, please let us know.

This is what the largest "on record" jump in GC looks like.

So while SMRA may be stumped, Bloomberg has some ideas, and suggests that the Treasury GC repo trading around 50bps/35bps at quarter-end is due to regulations forcing largest banks to hold more collateral on their balance sheets. Further, mortgage repo traded as high as 70bps, according to TD Securities.

Bloomberg quotes Citi strategist Andrew Hollenhorst who said that higher repo rates indicate “the marginal cost of banks’ unwillingness to expand their balance sheets." "It’s more of an interdealer phenomenon than for cash investors, though they may see rates move a little higher in sympathy."

Looking elsewhere at money markets, MM funds have had access to ~$500b in quarter-end collateral via Fed’s O/N, term RRP operations, part of the infamous liquidity quarter end window dressing have discussed extensively in the past.

In other words, while the move in GC is huge, it should normalize tomorrow. Then again, the question remains: just how big is the structural collateral shortage if discontinuities like quarter-end reflect a huge market imbalance between market clearing when everyone rushes to satisfy their regulator, and further begs the question: if banks only satisfy regulatory requirements on just one day of any given quarter, what would happen to the banks if something "unexpected" happened on any of the 89 or so other days during the quarter that don't happen to fall on month-end?

 

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Tue, 03/31/2015 - 10:33 | 5945250 ShorTed
ShorTed's picture

And the Fed RRP facility did 202 yards today.

Tue, 03/31/2015 - 10:52 | 5945304 NotApplicable
NotApplicable's picture

Why that's nothing another "bad bank" can't cure!

Tue, 03/31/2015 - 10:34 | 5945252 dimwitted economist
dimwitted economist's picture

it's because of the Recovery (STRONG) ongoing in the USA.. thank you president obama!

Tue, 03/31/2015 - 10:38 | 5945266 Bastiat
Bastiat's picture

Do you work for the PBS Nightly  Business Report?

Tue, 03/31/2015 - 10:45 | 5945277 ShorTed
ShorTed's picture

No, repo trader

Tue, 03/31/2015 - 10:35 | 5945255 jump_mutha_fukah
jump_mutha_fukah's picture

"what would happen to the banks if something "unexpected" happened on any of the 89 or so other days during the quarter "

Muppets get mauled that is what would happen.

Tue, 03/31/2015 - 11:14 | 5945363 Dr. Richard Head
Dr. Richard Head's picture

Wouldn't it be nice if us plebes had access to a Reverse Reverse Repo window?  Lety's say on April 14-16th, where we could take any assets or income (if one is lucky enough to have any) and turn them into a liability through Fed Magic and then report negative income for the year and earn a nice tax return bonus?  Then swap out the debt back to the Fed and retrieve one's assets and all would be well in the world.  It would be like helicopter money, while digging financial holes and refilling them Krugman-style. 

Tue, 03/31/2015 - 11:21 | 5945385 99oakley
99oakley's picture

"taxpayers get mauled that is what would happen."

Fixed that for you.

Tue, 03/31/2015 - 10:35 | 5945256 wagthetails
wagthetails's picture

this chart can be used as collateral

Tue, 03/31/2015 - 12:04 | 5945512 combatsnoopy
combatsnoopy's picture

your mom could be used as collateral. 

Tue, 03/31/2015 - 10:36 | 5945259 AccreditedEYE
AccreditedEYE's picture

"Unexpected" things don't happen anymore. Everything is "fixed". All you need to know is BTFD.

Tue, 03/31/2015 - 10:37 | 5945260 firstdivision
firstdivision's picture

Dark Helmet: Careful you idiot! I said more Facebook shares, not ETF's.

Laser Gunner: Sorry sir! I'm doing my best!

Dark Helmet: Who made that man a trader?

Major Asshole: I did sir. He's my cousin.

Dark Helmet: Who is he?

Colonel Sandurz: He's an asshole sir.

Dark Helmet: I know that! What's his name?

Colonel Sandurz: That is his name sir. Asshole, Major Asshole!

Dark Helmet: And his cousin?

Colonel Sandurz: He's an asshole too sir. Gunner's mate First Class Philip Asshole!

Dark Helmet: How many asholes do we have on this ship, anyway?

[Entire bridge crew stands up and raises a hand]

Entire Bridge Crew: Yo!

Dark Helmet: I knew it. I'm surrounded by assholes!

[Dark Helmet pulls his face shield down]

Dark Helmet: Keep buying, assholes!

 

http://bloomberg.econoday.com/byshoweventfull.asp?fid=467453&cust=bloomberg-us&year=2015&lid=0&prev=/byweek.asp#top

 

 

Tue, 03/31/2015 - 10:40 | 5945268 Dr. Engali
Dr. Engali's picture

"what would happen to the banks if something "unexpected" happened on any of the 89 or so other days during the quarter that don't happen to fall on month-end?"

 

Silly Tyler. We already know the answer to this question. We would be threatened with tanks in the streets as an ultimatum for another bail out would be demanded. 

Tue, 03/31/2015 - 11:06 | 5945343 NoDebt
NoDebt's picture

Sounds like a lot of work.  I suspect just lying would be easier.

Tue, 03/31/2015 - 10:40 | 5945270 JRobby
JRobby's picture

"The GC rate has seen sharp moves at quarter end in the past, although today's jump is the largest we have on record. We do not have a definitive explanation for today's movement, but if any of our readers have an explanation, please let us know."

 

Scarcity of collateral is making positioning your quarter end balance sheet more expensive.


Tue, 03/31/2015 - 10:43 | 5945274 SandiaMan
SandiaMan's picture

They collateralize Greece?

Tue, 03/31/2015 - 12:02 | 5945497 combatsnoopy
combatsnoopy's picture

They super-rehypothicated Zeus, Triton, Poseidan and Aquaman.   The mermaids are just a novelty. 

Tue, 03/31/2015 - 10:49 | 5945290 Bell's 2 hearted
Bell's 2 hearted's picture

"The overnight general collateral rate jumped to 0.38% this morning."

banks needn't worry ... i'm sure they'll just pass along to depositor ... hhmm, where is my statement? ... need to find out what new charge they're hitting me with ...

Tue, 03/31/2015 - 10:51 | 5945297 Rainman
Rainman's picture

' Quarter-end window dressing by the banksters is hereby outlawed '

            SEC, 2010

Tue, 03/31/2015 - 11:01 | 5945327 nakki
nakki's picture

Isn't this what Lehman was doing for 3 quarters right before, well you know the rest.

Tue, 03/31/2015 - 12:18 | 5945565 glenlloyd
glenlloyd's picture

They were doing it until they couldn't...then they died.

Tue, 03/31/2015 - 11:10 | 5945353 Shitgum Suicide
Shitgum Suicide's picture

Good God this Repo market is just the craziest shit imaginable. I had to look up what GC was and man what a nose bleed of convoluted crap it is. However, After reading about it, I noticed the premise of the concern about GC seems a little wrong and this is according to the experts who trade in this garbage . Here is the main definition of what GC is and does.

General collateral or GC is the range of assets that are accepted, at any particular moment, as collateral in the repo market by the majority of market intermediaries and at a very similar repo rate --- the GC repo rate. In other words, the repo market as a whole is indifferent between securities that are to be in the ‘general collateral basket’. GC assets are high quality and liquid, but none is subject to exceptional specific demand. The GC repo rate should therefore be driven purely by the supply of and demand for cash (not by the supply of and demand for individual assets). As such, the GC repo rate should be closely correlated to other money market rates, although trading at a spread representing in the lower credit and liquidity risks in repo.

The part where it says, "GC are high quality and liquid and none should be subject to specific exponential demand." Is where I have issue with this line of thinking.

Any thoughts ?

Tue, 03/31/2015 - 11:41 | 5945440 LawsofPhysics
LawsofPhysics's picture

Yes, two points;

1) show me that "collateral" motherfuckers...

and

2) when fraud is the status quo, possession is the law.

Welcome to the "global weimar" experiment...

Tue, 03/31/2015 - 12:00 | 5945492 combatsnoopy
combatsnoopy's picture

Old Bazoooka Joe Bubble Gum wrappers (WITH the comics- this is VERY important) are "high quality and liquid and none should be subject to specific exponential demand."
 

Tue, 03/31/2015 - 12:14 | 5945547 janus
janus's picture

"any thoughts?"

sure.

the most important attribute of GC -- relative to the spike in repo/cash rates, the point of the article and their function within the banking sector -- is that they are approved collateral for various regulatory agencies.  it's more important to know how they work than what they are (they are basically a basket of bonds from uncle sam's sanctioned friends); and the alarming feature in this article -- the one that no one has so far mentioned -- is the surging trend-line at each quarter-end peak.  this is some scary shit to my eye.  this suggests a larger and larger magnitude of swaps to temporarily satisfy regulators in an atmosphere where bona fide GC ain't what it used to be, euro banks are still cratering by the day and everybody's at the same moment scrambling to obtain the same brands of GC which should not be subject to...well, you've written 'exponential demand' but, at the risk applying logic to market mechanisms that shook-off logic long ago, i'll guess that you should've written "exceptional demand"...and that's sorta the point.  GC should not be impaired by issues of demand or liquidity -- otherwise, they couldn't function as bona fide collateral.  long-long ago, they used to use this shiny shit called gold; but that was before it was proven scientifically and incontravertably that ust 30yr & boj & boe & swissies & fill in the blank were permanently immune to issues of demand and liquidity (good as gold).  and this spike in rates, the galactic ebb & flow of GC from institutions and back into the ether of 'dark pools', dubious balance sheets filled with sub-junk for 89 days per quarter, and the accumulating pressure suggest that they are in fact subject to issues of demand and liquidity (duh) -- especially when their value is predicated on the sub-junk shit stuffed in every bank officially sanctioned a FOUS (friend of uncle sam) that's recycled 4X per annum, puffed up with hopium, full of the certainty that turds can be polished to a high-shine and shit will eventually ferment into shinola.

something that uncle sam failed to anticipate when concocting these emergency measures is that, perhaps -- and much like 'terrorism' -- bond vigilantes were no longer rouge actors within markets; that they could in fact assume the form of nation-states, acting in concert, extraneous to the 'market' itself.  some of those (potential) nation-state bond-vigilantes are moving to immunize themselves from what they (may) be planning -- and preparing to cut their losses where they have to.  all is fair in love and war.

but, janus ain't nearly as market-savvy as many round these parts...i just try to learn what i can as it comes. 

janus

Tue, 03/31/2015 - 12:21 | 5945577 glenlloyd
glenlloyd's picture

Actually I think we do get that, at least that's what I take away as the main point here.

Tue, 03/31/2015 - 12:46 | 5945666 janus
janus's picture

sometimes the explicit needs a bit of coaxing such that it may for all of us (especially those of us who aren't market pros) be truly EXPLICIT.  and for my part, it is often by commenting on something that i gain clearer insight into the thing.  i do also see your point -- and some assumptions should be taken for granted -- but if my instincts are correct, and this article belies the magnitude of malfeasance i think it does, then we'd have far more comments on it by now.  and so i must conclude that 'we' don't all get it (at least, not in proportion to its importance), and i therefore felt compelled to underscore its importance in some way.  unless, that is, i don't get it -- and if i don't, i hope someone will come out and say there's nothing to this and it's just another meaningless blip in a sea of benign blips.   

Tue, 03/31/2015 - 12:27 | 5945603 LawsofPhysics
LawsofPhysics's picture

pretty good, albeit useless, analysis.

The bottom line is that everyone seems to have forgoten what is taught, albeit breifly, on the first day of any ECON class.  Specifically that there is no economic, monetary, or political solution (aside from killing other humans) to resource scarcity.

Precisely why is is so important to keep money and your monetary system grounded in reality.  this has less to do with "fairness" human nature being what it is and everything to do with preventing a exponential paper claims on real assets from growing to the crisis point.

Again, the point of no return was past a long long time ago.

Prepare yourself and your tribe, eventually all these fuckers who think the world owes them something will go looking for real shit.

Tue, 03/31/2015 - 13:20 | 5945769 janus
janus's picture

LOP, i gave you an up-arrow for superfluous orneryness.  we sure aren't the cuddliest web-community around, but we are first-rate trouble-makers.

and as to your advice, i'm way ahead of you...i've already had my claim on the atlantic ocean officially notarized.  all this time a massive store of protein and vital shipping route sits ownerless and idle -- not anymore!  i was considering extending my claim to all lands bordering my new bathtub, but these obscene notary fees can be prohibitive (some say i've got to issue separate claims for every single country rather than a single all-encompassing decree); and, what is more, i'm not sure i want 'all' those counties...some seem to be more trouble than they're worth...like, for example, what the fuck am i going to do with mauritania?  

     https://www.youtube.com/watch?v=uSQUE8nw0Ao

janus

Tue, 03/31/2015 - 13:36 | 5945802 LawsofPhysics
LawsofPhysics's picture

Awesome, any trouble with the NAVY regarding your claims yet?  Personally I don't think they will matter much when there is no fuel for their ships...

On a per gallon basis, not a lot of protein in the atlantic really...   ..lots of salts though...

could be a while though...

Tue, 03/31/2015 - 13:07 | 5945727 assistedliving
assistedliving's picture

They're S&P and Moody's rated.  no worries

Tue, 03/31/2015 - 11:13 | 5945364 buzzsaw99
buzzsaw99's picture

i see nothing [sgt schultz]

Tue, 03/31/2015 - 11:19 | 5945379 Murderin' Murphy
Murderin' Murphy's picture

We collateralized some folks.

Tue, 03/31/2015 - 11:39 | 5945432 LawsofPhysics
LawsofPhysics's picture

Bullshit.  show me that "collateral".

Tue, 03/31/2015 - 12:04 | 5945511 Arnold
Arnold's picture

Here's a big part of bank collateral, as marked assets they are not much good for anything else.

 

 

http://fortune.com/2014/04/10/collateralized-loan-obligations-our-next-f...

Tue, 03/31/2015 - 12:10 | 5945526 LawsofPhysics
LawsofPhysics's picture

not surprising, we passed the point of no return a while back.  The world has seen such "let the majority eat cake" monetary experiments before, this one will end no differently.

Tue, 03/31/2015 - 13:14 | 5945748 bluskyes
bluskyes's picture

million dollar FRN's

Tue, 03/31/2015 - 11:46 | 5945458 papaswamp
papaswamp's picture

Fed dumped about $14 Billion in MBS on the 25th... Maybe nobody wants it.

Tue, 03/31/2015 - 12:10 | 5945529 Bear
Bear's picture

I'll take it, but they still want 'something' for it.

Tue, 03/31/2015 - 11:59 | 5945487 combatsnoopy
combatsnoopy's picture

It's a bird!  It's a plane!  It's SUPER-rehypothication!  

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