Today's "Watershed" Repo-calypse Is "One Of The Worst Things That Can Happen"

While it is being ignored by most (because the S&P didn't crash), the chaos in the Fed-controlled short-term liquidity markets should panic everyone as for the first time in a decade, NYFRB was forced to inject liquidity for o/n repo...

Source: Bloomberg

Repo rates kept rising despite the Fed's operation...

Source: Bloomberg

In context, this is quite a move...

Source: Bloomberg

As one veteran short-term rates trader explained...

Bottom line: here’s what the market thinks of the Fed’s temporary solution…

It’s a joke.

MORE COWBELL?

More cowbell indeed.

As Bloomberg reports, today’s surge in Treasury repo rates poses a threat to the market more broadly because traders won’t take new positions without confidence in their ability to obtain funding at consistent rates, said John Fath, managing partner at BTG Pactual Asset Management and a primary dealer trader from 1993 to 2008.

Today was a bit of a watershed event, though we’ve been seeing this brewing. When they set funds rate target at 2 to 2.25, ideally you would like to funding to be around 2.15. For weeks it’s been above that.
“Today was more dramatic. Funding opened at 4.5, quickly moved to a high of 10, then dropped back to 2.50, nothing close to 2.15. So you’ve lost control of where you want financing.

Overnight financing is the key to driving the economy, leverage. If you don’t have control over it, what’s the point of setting a funds rate? If they ease tomorrow and funding is at 4%, does it matter if they eased?

If the plumbing doesn’t work, then it’s going to dramatically affect secondary trading of Treasuries. Which is the last thing they need when there’s massive issuance going on.

This is without a doubt one of the worst things that can happen. In many respects it overshadows the Fed moving tomorrow, because if the plumbing doesn’t work everything starts to break down. Everything is predicated upon your getting a reasonable funding rate. Otherwise why would you buy this paper to begin with. If you’re funding your overnight position at 6 why would you buy a 10-year at 2?

Today’s funding market was more emblematic of what goes on in emerging markets rather than the largest developed debt market in the world. The bid-offer spread in repo should be a couple of basis points. At 7am it was 100bp. It was moving in increments of 50bp up and down. Dealers weren’t quoting pricing in terms of size. That alone is suggestive of a market that’s broken in the short term. The Fed would’ve been proactive by intervening at that point. By intervening at 10, it’s too late. Most people need funding by 8:30. They didn’t even get to the targeted amount, because it was just too late. The damage was done. If you’re a foreign investor seeing rates all over the map it doesn’t reinforce your viewpoint that things are working well.

“A number of people have called asking what it’s going to look like tomorrow. These shouldn’t be issues for the marketplace. Why would you initiate putting on new positions, trading in secondary market, if you were concerned about how consistent funding’s going to be going forward. It’s just a settlement date -- what’s year-end going to be like? These are questions people have asked me, in panicked way.

It’s a bigger deal than a rate cut by far. It’s meaningless if you put in a rate cut and overnight financing reflects nothing of that rate cut. Which is what’s happening right now. I’m surprised they let this get out of hand.”

How many more fleshwounds is this market going to withstand in the vain hope that Powell will keep delivering?

And before we move on to the rest of the markets, let's put today's repo chaos in context. As Monday Morning Macro notes, Here are a few “large” moves that markets have seen over the past few weeks. Notice anything that stands out?


Suffice to say, we’re not supposed to be talking about $ funding markets – the linchpin of the largest & most important (there, I said it) market in the world, US Treasuries – in the same breath as the wreckage wrought in Argentina only a month earlier. We’re definitely not supposed to be saying “the collapse in the Argentine Peso was barely 1/3 of what we just saw in the market that the Fed controls…”

Yet here we are.

*  *  *

Chinese stocks tumbled overnight...

Source: Bloomberg

European markets were mixed today with France and Germany best, Italy worst...

Source: Bloomberg

Nasdaq, Dow, and S&P limped along sideways today (until the late-day rampathon) as Small Caps and Trannies dipped and ripped...

NOTE - the ramp was all about getting the S&P and Nasdaq and Small Caps back to even on the week

S&P was pumped to ensure that it closed above 3000 - to prove that repo chaos is a fleshwound...

Energy stocks erased a big chunk of yesterday's gains as oil prices slipped back lower...

Bank stocks rolled over after 8 straight days higher...

Source: Bloomberg

Defensives dominated today;s action but cyclicals rebounded from a weak open...

Source: Bloomberg

"Most Shorted" stocks tumbled at the open - no squeeze today - but bounced after Europe closed...

Source: Bloomberg

Factors were volatile again today with value weaker and momentum soaring early but fading late...

Source: Bloomberg

Bank stocks stalled at the usual spot...

Source: Bloomberg

 

Treasury yields extended their decline today with 30Y now down over 10bps since Friday's close

Source: Bloomberg

Meanwhile, WeWork bonds crashed...

Source: Bloomberg

Which makes WeWork a higher risk than Tesla...

Source: Bloomberg

Before we leave rates-land, we note that there is a 13.5% chance of a 50bps cut tomorrow and 86.5% odds of a 25bps cut...

Source: Bloomberg

And that rate-cut will come with full employment, surging inflation, record high stock prices, and near record low interest rates.

The Dollar Index puked pretty hard today, erasing all of yesterday's gains...

Source: Bloomberg

Lots of chatter today about President Trump's falling approval rating. However, seems to be holding up the dollar for now...

Source: Bloomberg

The Dollar dive was dominated by a surge in EUR and GBP...

Source: Bloomberg

Yuan tumbled back below the fix after dismal macro data...

Source: Bloomberg

Altcoins dominated crypto markets today with Ripple soaring most along with Ethereum...

Source: Bloomberg

As Bitcoin trod water, holding above $10,000 once again...

Source: Bloomberg

Silver outperformed, gold was flat (despite the dollar's drop), as crude tumbled on Saudi headlines and copper drifted lower...

Source: Bloomberg

Silver extended yesterday's gains, pushing above $18 once again...

Oil prices tumbled early on after Reuters headlines claimed that Saudi production would be back online within 2-3 weeks but then oil rebounded on Washington reports that missiles were fired from Iran to hit the refinery. However, the new Saudi energy minister spoke to press late on and sent the price back down again...

  • *SAUDI OIL MINISTER: WE HAVE CONTAINED THE DAMAGE

  • *ABQAIQ IS PROCESSING 2 MLN B/D OF OIL: ARAMCO CEO

  • *ARAMCO AIMS TO RESTORE ABQAIQ TO PRE-ATTACK LEVEL BY END-SEPT

Source: Bloomberg

Prepare yourself for higher pump prices...

Source: Bloomberg

And finally,