Repo Market

In a move that will surely shock, shock, the monetary purists out there, the Bank of Japan has just gone and done what we predicted back in May 2011, with the first of our "Hyprintspeed" series articles: "A Look At The BOJ's Current, And Future, Quantitative Easing" (the second one which discussed the imminent advent of the ¥1 quadrillion in total debt threshold was also fulfilled three weeks ago). So just what did the BOJ do? Why nothing short of join the ECB, the BOE, and the Fed (and don't get us started on those crack FX traders at the SNB) in electronically printing even more 1 and 0-based monetary equivalents (full statement here). From WSJ: "The Bank of Japan surprised markets Tuesday by implementing new easing policies and moving closer to an explicit price target, the latest sign of growing worries around the world about the ripple effects of the European debt crisis on the global economy. With interest rates already close to zero, the BOJ has relied in recent months on asset purchases to stimulate the economy. In Tuesday's meeting, the central bank expanded that plan by ¥10 trillion, or about $130 billion. The facility, which includes low-cost loans, is now worth about ¥65 trillion, or $844 billion." The rub however lies in the total Japanese GDP, which at last check was $6 trillion (give or take), and declining. Which means this announcement was the functional equivalent to a surprise $325 billion QE announced by the Fed. What is ironic is the market reaction: the BOJ expands its LSAP by 18% and the USDJPY moves by 30 pips. As for gold, not a peep: as if the market has now priced in that the world's central banks will dilute themselves to death. Unfortunately, it is only at death, and the failure of all status quo fiat paper, that the real value of the yellow metal, whose metallic nature continues to be suppressed via paper pathways, will truly shine.

The Treasury just sold $24 billion 10 Years in a completely unremarkable bond auction, which was virtually a carbon copy of the January sale of 10 Year, except with a slight drop in the Bid To Cover, which declined from 3.29 to 3.05, and an increase in the yield from 1.90% to 2.02%. All the other metrics were essentially the same as a month earlier: Directs at 17.9% vs 17.4% prior, Indirects 38.9% vs 38.4% before, and Dealers at 43.3% vs 44.4% before. And now, heartened by this successful sale, the Fed itself is in the market selling $8.00-$8.75 billion in 1.5 year bonds. In other words, bonds for everyone - it is a repo market ponzified debt issuance bonanza!

Today's early (due to the FOMC statement and press conference) $35 billion in 5 year bonds auction was another uneventful issue of debt. Pricing at 0.899%, or well inside of the 0.915% When Issued, today's latest addition to the US $15.3 trillion in debt came at a 3.17 Bid To Cover, the highest since May 2011. The fact that BTCs continue to rise consistently even as yields decline makes lots of sense in some parallel universe, or in this one, when one considers that the bulk of the paper promptly makes its way to the repo market where it is quickly swapped for cash. The reason for the jump in implied demand was primarily the Direct Bid which took down 15.1% of the final allotment, the most since November 2010. The Indirect Bid was in line at 43.4%, compared to the TTM average of 43%, while Dealers saw a modest drop in their take down, coming below the average of 45.8% at 41.5%. This leave just tomorrow's $29 billion in 7 Year bonds in the weekly issuance docket, even without a formal debt ceiling raise. Net of all auctions that have taken place while the debt ceiling has not been increased, total US debt is now well in the $15.3 trillion bucket.

It has been a busy weekend for Wall Street, which has been doing all it can to spin the S&P downgrade in the best favorable light, although judging by the initial EURUSD and EURJPY reaction, so far not succeeding. Below we present a quick report written by Goldman's Lasse Nielsen on why in Goldman's view the downgrade's "impact is likely to be limited" and also the quick notes from an impromptu call MS organized for institutional clients (which had just two questions in the Q&A section, of which only one was answered - it appears virtually noboby believes that global moral hazard will allow anyone to fail at this point, so why bother even going out of bed).

Imagine pensions not paying retiree funds, insurers not paying claims, and banks collapsing everywhere. Sounds like fun? I will be discussing this live on RT's Capital Account with the lusciously locquacious Lauryn Lyster at 4:30pm.

While hardly news to those who have been following our coverage of the shadow banking system over the past two years, today Reuters has a curious angle on the European "repo" problem: namely, it appears that over the past several months the primary marginal source of cash in the ultra-short term secured market in Europe are not banks, the traditional "lender" of cash (for which banks receive a nominal interest payment in exchange for haircut, hopefully, collateral) but the companies themselves, which have inverted the flow of money and are now lending cash out to banks (with assorted collateral as a pledge - probably such as Italian and Greek bonds), cash which in turn makes its way to none other than the ECB (recall that as of today a record amount of cash was deposited by European "banks" with Mario Draghi). From Reuters: "Blue-chip names like Johnson & Johnson, Pfizer and Peugeot are among firms bailing out Europe's ailing banks in a reversal of the established roles of clients and lenders. One source with knowledge of the so-called repo deals or short-term secured lending, said the two U.S. pharmaceutical groups and French carmaker were the latest to sign up for them." Which intuitively makes sense: as has been well known for years, companies are stuck holding on to record amounts of cash, although what has not been clear is why? Now we know, and it is precisely for this reason: corporate treasurers have known very well that sooner or later the deleveraging wave will leave banks cashless, and corporates themselves will have to become lenders of last resort, especially in a continent in which the central bank is still rather concerned about sparking inflationary concerns.

No, there is no problem with the repo markets. None whatsoever. Absolutely none. Oh, uhhh, wait a second...

Tired of all the lies that a US downgrade will have no impact whatsoever on unsecured funding be it money markets, repo or so many other shadow banking system components (full list is below)? So are we. Which is why we were very interested to read the following summary of a Nomura research report that a US downgrade "may cause a repo liquidity freeze." Remember the Ice-9 in money markets following Lehman? Well, it may not be quite as big as money markets (last at $2.7 trillion), but at $1.3 trillion, frozen Repos will certainly cause a lot of headaches, especially with a dramatic scarcity of short-term Bills available in the market place for replacement capital flow. For all those wondering why the Fed and the BIS have been writing paper after paper (here, here and here) warning about the potential complications arising from the shadow banking system, this is precisely the reason.

Bailout rumor refusal - check, bank/country run - check, collateral pulls - check. If anybody tells you there is everything in common between Greece and Lehman/AIG, believe them. The latest escalation in the Greek crisis comes courtesy of Greek daily Banking News which notes that the latest nail in the Greek coffin comes from formerly major Greek players, Deutsche Bank and Unicredit, which over the past 2-3 weeks have ceased accepting Greek collateral and have pulled out of the Greek repo market altogether.

Has it been a whole 24 hours since we last heard about Mutual Assured Destruction if bankers don't get their way? It must be, because according to Dow Jones the Treasury market is presumably considering how to exclude the $5 trillion repo market from any "banker" taxation after "market participants" implicitly threatened with failed bank auctions unless this exemption is granted.