Low Bank reserves - Fed intervenes

[atmsmshr]

I somewhat understand the stock market, barely grasp the bond market, and remain flummoxed by Banking reserves, overnight lending, repos, and intrabank lending.

US bank liquidity was short this week and overnight repo rates hit 10% last Tuesday. As a result, the Fed bought up abut $50 billion in Treasuries and securitized mortgages so get FMOC rates back in the 2+% range, every day this week since Tuesday!



https://www.cnn.com/2019/09/17/business/overnight-lending-rate-spike-ny-fed/index.html

Any problem with banking liquidity reminds me of Lehman and Bear Stearns, especially when the Fed immediately has to respond with 'putting money in the window' and stating publicly 'keep moving along there no problems here'.

I try to tune out the noise, and don't plan on any portfolio changes since we had already built a SORR bond tent portfolio just prior to retirement this summer. However, credit liquidity concerns me for the health of the economy.

Does anyone care to share insights on what the overnight interbank lending liquidity issue this week means?

 

[ckelly78z]

Just today, I converted my still working 401K from 100% equities (24.77% YTD returns) to income securities with the threat of a downturn. Hopefully, I can jump back in later this year.

 

[MichaelB]

Any problem with banking liquidity reminds me of Lehman and Bear Stearns, especially when the Fed immediately has to respond with 'putting money in the window' and stating publicly 'keep moving along there no problems here'.

I try to tune out the noise, and don't plan on any portfolio changes since we had already built a SORR bond tent portfolio just prior to retirement this summer. However, credit liquidity concerns me for the health of the economy.

Does anyone care to share insights on what the overnight interbank lending liquidity issue this week means?

What I’ve read doesn’t point to an issue similar to Lehman or Bear Sterns, where there was both a mismatch between liabilities and asset valuations together with a mismatch in cash flows.

This case appears to be a shortage of cash and collateral for short term financing in the financial system, and was foreseen - written about in the FT a month ago, here https://ftalphaville.ft.com/2019/08...-s-a-black-hole-in-the-dollar-funding-market/

The FT is hinting that someone in the N.Y. Fed might have been asleep at the wheel. It’s also a reminder that monetary policy is not easy.

 

[atmsmshr]

MichaelB,

Thanks for the reference to FT; although I still have a third grade reading comprehension with respect to intrabank overnight lending.

"In short, there are too many dollar-denominated safe assets in the market and not enough liquidity and hence -- very possibly -- the makings of a fresh liquidity crisis.

As Pozsar explains:

Because inflows into the facility sterilize reserves and add collateral to the financial system, they worsen the collateral surplus. But don’t blame the foreign central banks placing cash into the facility, for they do what a rational person would do when offered something that has value – take as much of the stuff as they can, while they can.
​

Pozsar adds the current inversion is the most extreme relative to overnight repo rates, and that historically this is the first time that the curve has inverted relative to these rates"

For me, this sort of makes sense that government deficits and yield inversion are soaking up liquidity and the money supply will have to expand.

What that means for us mortals is yet to be written.

 

[MichaelB]

For me, this sort of makes sense that government deficits and yield inversion are soaking up liquidity and the money supply will have to expand.

Right. You can add “global reserve currency” to your list.

What that means for us mortals is yet to be written.

+1 Not sure how it affects us, although it highlights the importance of policy execution and day to day operational oversight.

Here’s another explanation of what this is about

https://twitter.com/x/status/1173947325661757440

 

[atmsmshr]

Great - I think I'm Lisa in the cartoon.

 

[Spock]

....
The FT is hinting that someone in the N.Y. Fed might have been asleep at the wheel. It’s also a reminder that monetary policy is not easy.

There was an article about 6ish weeks ago about somebody at the fed fired the team that did a lot of the analysis heavy lifting. Being a slanted article it forecasted that the current idiot in charge of that area was going to fumble something serious. If I can find it back it would be interesting if the fired research team was in this area.

ETA: found the article

Bingo. And what's worse, Williams [John Williams, new president of the NY Fed as of April 2018]- in what was likely an ego tantrum - inexplicably fired the two most important people in his inner circle who have had their pulse on the capital markets for the past decade.

https://www.bloomberg.com/news/articles/2019-08-04/abrupt-ousters-shake-staff-inside-new-york-fed
https://www.zerohedge.com/news/2019-08-04/meanwhile-inside-plunge-protection-team-chaos

 

[SunBlueSky]

I somewhat understand the stock market, barely grasp the bond market, and remain flummoxed by Banking reserves, overnight lending, repos, and intrabank lending.

US bank liquidity was short this week and overnight repo rates hit 10% last Tuesday. As a result, the Fed bought up abut $50 billion in Treasuries and securitized mortgages so get FMOC rates back in the 2+% range, every day this week since Tuesday!



https://www.cnn.com/2019/09/17/business/overnight-lending-rate-spike-ny-fed/index.html

Any problem with banking liquidity reminds me of Lehman and Bear Stearns, especially when the Fed immediately has to respond with 'putting money in the window' and stating publicly 'keep moving along there no problems here'.

I try to tune out the noise, and don't plan on any portfolio changes since we had already built a SORR bond tent portfolio just prior to retirement this summer. However, credit liquidity concerns me for the health of the economy.

Does anyone care to share insights on what the overnight interbank lending liquidity issue this week means?

Here is letter to Treasury Secretary Steven Mnuchin from Elizabeth Warren asking questions about the continuing overnight interbank liquidity issues.

https://www.warren.senate.gov/imo/media/doc/2019.10.18 Letter to Mnuchin Re Repo Funding Turmoil.pdf

Excerpt:
FSOC is responsible for identifying and responding to emerging risks to the stability of the financial system the U.S. As Chair of FSOC, you are tasked with overseeing these efforts. Given the lack of clarity about the cause of the current short-term funding strains and whether this cause could relate to a larger problem in financial markets, we ask that you respond to these questions by no later than November I, 2019.

1. What are the underlying cause(s) of the spike in borrowing rates for overnight repurchase agreements?
a.What information has FS()C collected or analyzed to reach these conclusions?

b.Does the Department of Treasury have any information or data that would indicate that these fluctuations could be a manifestation of a separate underlying risk to the financial sector?

c. What is FSOC doing to mitigate these underlying risks?

2. Has FSOC learned why the Fed announced on October 11, 2019 that overnight operations would be extended "at least through January of next year."?

a. What are the risks to the economy and to market participants of extended volatility in the overnight repo market?

b. What additional steps are you taking to mitigate these risks and ensure that the impact of these market disruptions does not trickle down to consumers?

3. In FSOC's 2018 Annual Report, the Council expressed support for the Office of Financial Research's (OFR) proposed rule to collect data on centrally cleared repo transactions. In 2019, that rule was finalized.

a. How will FSOC and Treasury use these data to gain further understanding of the repo market?

b. Is this data collection sufficient to monitor the ongoing trends in the short-term lending market?

 

[Starsky]

I think the issue here is that the Treasury has been lowering its money supply at the same time that the banks are facing short-term liquidity issues by holding too many non-cash assets on their books.

I don't know much about the technical analysis, but I believe these two things occurring simultaneously reduce the system's ability to respond to liquidity crises in much the same way excessively low prime interest rates make it harder to stimulate the economy when we need to manage inflation and consumer demand.

Here's a decent overview: https://youtu.be/8SE2W5b8dp8

 

[SunBlueSky]

Fed Repo increase to 120B from 75B

Fed is again upping its repo injections.

From CNBC/Jeff Cox: "The Federal Reserve is ramping up the amount of temporary liquidity injections it is providing for overnight lending markets.

Starting Thursday, the repo operation offerings will escalate to $120 billion from the current $75 billion as the central bank continues to calibrate the right amount of funding needed to keep the markets operating properly and to hold the overnight funds rate within its target range.

The announcement came from the New York Fed, which did not elaborate on the reason for the increase. However, it comes a day after the Fed injected just shy of $100 billion into the system via an operation where it provides banks with cash in exchange for high-quality assets like government bonds."

https://www.cnbc.com/2019/10/23/fed-repo-overnight-operations-level-to-increase-to-120-billion.html

https://www.newyorkfed.org/markets/opolicy/operating_policy_191023

 

[SunBlueSky]

I think the issue here is that the Treasury has been lowering its money supply at the same time that the banks are facing short-term liquidity issues by holding too many non-cash assets on their books.

I don't know much about the technical analysis, but I believe these two things occurring simultaneously reduce the system's ability to respond to liquidity crises in much the same way excessively low prime interest rates make it harder to stimulate the economy when we need to manage inflation and consumer demand.

Here's a decent overview: https://youtu.be/8SE2W5b8dp8

Starsky, thanks for the good video.

Another article in CNBC talks about the Fed's QT (quantitative tightening) and the liquidity regulations that have resulted in the banks not wanting to lend their cash overnight.
https://www.cnbc.com/2019/10/22/fed...e-over-the-efforts-to-fix-funding-issues.html

 

[SunBlueSky]

Fed Chair Powell speaks to Repo liquidity

In today's new conference, Fed Chair Powell commented on the repo market and illiquidity problems. Sounds like they still are not sure why it happened...

This is from Bloomberg:

Powell said the Fed was surprised by the behavior of the megabanks last month. The agency had surveyed banks to find out the liquidity minimums they were comfortable with, but Powell said they stayed far above those thresholds instead of putting that liquidity to a more lucrative use.

“They didn’t deploy that liquidity when there seemed to be great opportunities to do that,” he said. “So why is that? We’re doing careful analysis.”
Treasury Secretary Steven Mnuchin said this week that he’s open to loosening post-crisis regulations that have stiffened liquidity requirements for big banks. While regulators have made some moves to relax the rules this year, the changes haven’t done much for Wall Street.

https://www.bloomberg.com/news/arti...ts-to-amp-repo-liquidity-without-rule-rewrite

 

[Senator]

Putting the money to work means loaning it out.

Banks understand credit risk, opportunity costs, and alternative investments.

Banks know how to make money without loaning to a high risk borrower.

 

[Spock]

In today's new conference, Fed Chair Powell commented on the repo market and illiquidity problems. Sounds like they still are not sure why it happened...

A couple of articles going back to Oct 2 point out the JP Morgan Chase, with a 2.something TRILLION balance sheet, "stepped away" from the repo market.
"Dimon said his firm had the cash and willingness to calm repo markets when they went haywire in September, but regulations held it back." and poof the SoT is looking into easing regulations on the megabanks.


"Meanwhile, as part of stepping away from the repo market, JPMorgan succeeded in forcing the Fed to restart not only repo operations, but also QE. As a result, the Fed began daily liquidity injections, and even as repo rates have since returned to more normal levels, the Fed has also resumed purchases of Treasuries to bolster bank reserves."


The pre-crash too-big-to-fail megabanks are now consolidated into fewer, even bigger gigabanks that have the system by the throat.

 

[SunBlueSky]

Putting the money to work means loaning it out.

Banks understand credit risk, opportunity costs, and alternative investments.

Banks know how to make money without loaning to a high risk borrower.

And now the Fed is loaning it out. Or, there is no "high risk borrower", just a shortage of liquidity due to regulations.

 

[SunBlueSky]

The pre-crash too-big-to-fail megabanks are now consolidated into fewer, even bigger gigabanks that have the system by the throat.

Yes, and these too-big-to-fail gigabanks have large amounts of derivatives, some with troubled Deutsche Bank:

https://wallstreetonparade.com/2019...bankers-and-deutsche-bank-timeline-of-events/

Deutsche Bank ...is heavily intertwined via derivatives with the big banks on Wall Street, including JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America.....Deutsche Bank has been in a slow motion collapse as a result of its serial crime charges while international regulators have failed to address the fact that it is a counterparty to $49 trillion notional (face amount) in derivatives according to its 2018 annual report and thus presents systemic risk throughout the global financial system

Systemic Risk Among Deutsche Bank and Global Systemically Important Banks (Source: IMF — “The blue, purple and green nodes denote European, US and Asian banks, respectively. The thickness of the arrows capture total linkages (both inward and outward), and the arrow captures the direction of net spillover. The size of the nodes reflects asset size.”)