tyb/s
All Eyes On Tomorrow's Repo Rate Blow Out
Repo Rate definition here
(basically it is the rate that banks charge other banks to lend to themselves- there is not much empirical about this either as it is just a survey. As to say, if one was asked what rate did you charge another bank to lend them money-the answer can be whatever they want it to be)
Definition of 'Repo Rate'
Definition: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
https://economictimes.indiatimes.com/definition/Repo-rate
All Eyes On Tomorrow's Repo Rate Blow Out
Back on January 1, we showed what was arguably the strangest move that took place on the last trading day of 2018, when the overnight general collateral repo rate shot up from 2.5% to as high as 6.125%, the biggest one day move on record, bringing overnight GC repo to the highest level since January 2001.
While violent quarter and especially year-end moves are well-known in the overnight funding markets, the magnitude of the Dec 31 surge was simply unprecedented, and commenting on the GC Repo surge, Scott Skyrm, EVP at Curvature Securities said that "the cash never came in," noting that while "funding pressure should be about 50 basis points" and yet what we got was "350 basis points."
What he is referring to is the odd predicament the US financial system finds itself in, whereby in complete opposite from 2015 when there was a shortage of safe assets, there is now a glut, largely thanks to the flood of T-bills and coupon Treasurys required to fund the soaring US budget deficit coupled with what appears to be a shortage of excess reserves, which as recent events in the market demonstrated are not nearly enough, and is the reason why the Fed ended its balance sheet rolloff prematurely (it is now expected to end around September, well ahead of its previous summer of tentative 2020 due date).
Now, as we have discussed on prior occasions, one means to address this collateral mismatch is the proposed and speculated Fed overnight fixed-priced, full allotment overnight repo facility, which would eliminate such year-end general collateral repo spikes which are the result of too many securities chasing too little cash. However, in the biggest surprise from the most recent FOMC meeting, the Fed did not indicate that it was preparing to rollout such a facility, which means that until there actually is an operating Fed-backed O/N repo facility, we will continue to see collateral spikes like the one shown above. (cap 2)
Which brings us to tomorrow's quarter-end, which will likely result in more general collateral repo fireworks.
Commenting on what to expect, we go back to Curvature Securities' repo-market expert Scott Skyrm, who in his daily note writes that "quarter-end is everything in the Repo market right now and how it trades tomorrow will impact not just on financing P&L, but future quarter-ends, and potentially Fed policy tools in the future (an RP facility?)."
As noted above, last year-end, so many banks had cut their balance sheets so that there was insufficient cash to fund the Repo market and overnight rates spiked to over 7.00%, and as Skyrm writes, "the Repo market is worried that the same scenario could occur tomorrow. As a result, the Repo market is "on edge."
Case in point, on Thursday - one day before the end of the month and the quarter - the quarter-end General Collateral moved from 3.50% this morning up to 3.85%, then down to 3.45% and now back up to 3.65%, just in the space of several hours.
https://www.zerohedge.com/news/2019-03-28/all-eyes-tomorrows-repo-rate-blow-out
(again this is just a survey they have however the result(s) are reported as concrete)
Cap 3 represents the game of hot potato the system plays with the crap assets they have. As the qtr draws to a close, in this case it is friday, they trade back and forth so that the activity from last qtr does not impact this qtrs balance sheet. Once Q2 starts they begin again with the same activity. It is one of the reasons you typically see rally's at the start of each qtr, no matter what the actual news or results are.
To have a better understanding of financial terms and language please see here:
https://www.investopedia.com/dictionary/
late last year they were pretty scarce and pricey. Seems to have abated now. Hardcover still about $60. Still need to finish the mullins book