Earlier this morning we were quick to congratulate the Fed for seemingly stabilizing the repo market, as the utilization of the day's first two repo ops - which also included one of the brand spanking new $500BN, 1 month ops - was tiny and the FRA/OIS rate appeared to normalize.
Unfortunately, a few hours later it has turned out that we spoke too soon, because this time the liquidity clog has shifted away from funding shortages (i.e., various OIS swaps) and right back to repo market access and availability, because a quick look at the overnight general collateral repo rate shows that despite the Fed's multi-trillion liquidity bazooka-cum-ZIRP, its rate surged by more than 200 basis points in early Monday trading, with GC briefly exploding as high as 2.50%, more than 2% above the effective fed funds rate and proof that one again something is broken, before retreating modestly, and according to Bloomberg, just prior to noon ET, GC was bid at 1%.
While this deserves an extended discussion, we will merely point out that each day there a distinct part of the credit and/or funding market is breaking:
- One day it is ETF NAV discounts blowing out;
- The next day the treasury Treasury Cash/Swap basis surges and funds suffer a historic VaR crash amid forced liquidations;
- Day three sees the FRA/OIS explode higher as a massive dollar funding margin call strikes;
- Then, day four sees the same repo crisis that was supposed to be fixed back in September return with a vengeance, as banks freak out about counterparty risk.
At the risk of being flippant, we would say that what the Fed needs is the monetary equivalent of Dr. House: someone who can diagnose what is actually wrong with the monetary plumbing, instead of using the same old shotgun approach of shoveling trillions in blunt liquidity into the market, which clearly is not working anymore.
Alas, the man who actually knows how to fix everything that the Fed has fucked up over the past decade, has not been born yet (and likely never will) which means the Fed is stuck throwing even more liquidity at the problem, and sure enough, after today's $500BN, 1 month repo, moments ago the Fed - clearly seeking to address the return of the repo crunch - announced that it will "conduct an additional overnight repurchase agreement (repo) operation for same-day settlement today from 1:30 PM ET to 1:45 PM ET. This repo operation will be conducted for up to an aggregate offered amount of $500 billion with a minimum bid rate of 0.10 percent."
And, as the NY Fed explains:
This action is taken to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets.
Hey hold on, wasn't the "supply of ample reserves" problem fixed last September when the Fed launched repos and, don't laugh, "NOT QE"?
That said, we don't even need to wait until 1:45pm to tell you what will happen: uptake on today's half a trillion repo will be tiny, probably around $15BN-$20BN, and while we doubt the GC repo rate will stabilize, we expect that a new crisis symptom will emerge somewhere as the Fed's liquidity is now no longer helping but is instead hurting a market which is flooding in excess liquidity and can't put any of it to the proper use.
Check back at 1:45pm for the result from today's repo which will do absolutely nothing to fix the broken credit and funding markets.