Thread by @lebas_janney

Quick primer: what is repo and why do we care all of the sudden? Thread. 1/x

Repo (repurchase or reverse repurchase agreement) is a common way to finance a bond. Essentially, an owner buys a bond and then borrows, say 95% of the value of that bond, posting the bond as collateral. 2/x

It's a really common way of financing Treasuries, MBS, other low risk bonds. $100s of billions trade every day. It's *the* main overnight borrowing rate in terms of volume, and while the @federalreserve doesn't control it, they have a lot of influence over repo. 3/x

Why we care, in one chart: 4/x

Overnight repo rates suddenly spiked to ~7% yesterday after rising steadily throughout the day. They're opening 7-10% this morning. That's a BIG and unexpected increase in financing cost for many asset owners. But the alternative is insolvency, so they pay it. 5/x

A host of short term things like corporate bond issuance, Treasury settlements, tax payments and such are coming together to squeeze the financing markets, but this is a symptom, not the underlying problem. 6/x

The underlying problem is that primary dealer balance sheets are chalk full of Treasuries (caused by increased issuance) and dealers desperately need to finance those Treasuries, which limits the flexibility of the system when short term needs arise. 7/x

Normally @NewYorkFed would fix these short term problems with "TOMOs" or "Temporary Open Market Operations" (essentially, they become repo lenders) but they appear non-reactive thus far for whatever reason. 8/x

My worry is a simple one: when repo rates spike, the weakest borrower get squeezed the hardest, and "surprises" tend to emerge, because there's no cheap financing to paper them over. 9/x

I'm talking about hedge fund blow ups, surprise losses from large but marginal banking entities, etc. The truly unpredictable stuff.

When repo breaks, risk market tend to suffer the consequences. 10/10. Fin.

PS: @NewYorkFed launches $75bln TOMO to regain control of EFFR. See how it goes...