1/It's the weekend, macro review, and time to post Reverse Repo making ATH last week and there will be wailing and gnashing of teeth across #fintwit over this rather uninteresting phenomenon so a 🧵on why it is so high.
2/Fed Balance Sheet Assets: prior to GFC this was <$1T and reflected NY Fed OMO to maintain Fed Funds, then Bernanke lost his mind IMO and started QE. The balance sheet grew from $946B to $4.5T ~8Yrs. We👀paint dry as the balance sheet shrank $700B until August 2019.
3/We had a bad cold/flu season in 2020, lost our collective minds, shut the economy down, and the Fed expanded the balance more using QE in the next 2 years than it did in 8 years following GFC.
4/Congress and Treasury doing Trump/Biden's bidding made drunken sailors blush with their spending thanks to flu season 2020.
5/Where did the Congress🤡get the 💵? They borrowed it of course issuing nearly $7T the past 2 years.
6/Who bought all those bills/notes/bonds? Banks! Bank Credit - Securities up 51% in 2 years.
7/Note Bank Credit Securities didn't rise as much as US sovereign debt levels. Why? J. Powell et all buying UST's in the secondary market. Fed balance sheet Treasury holdings more than doubled the past 2 years.
8/So the Fed buys some of the UST's banks are buying from Treasury. What happens to the federal government's proceeds from all those UST sales? They put it in their Treasury General Account (TGA) at the NY Fed where it balloons to $1.8T at the peak. This is not at a BANK.
9/The TGA declines from its peak then rapidly declines in spring 2021, why? Gimme that stimmie! $1,400, $600, etc times millions of recipients. What do the recipients do with it? Buy stuff, deposit it, pay debt, etc. ALL of which goes into BANKS whose reserves start to explode.
10/Refer back to item 2/ where I mentioned pre GFC the Fed conducted monetary policy via Open Market Operations, who remembers that? QE and OMO aren't compatible so the Fed needed a new system to maintain Fed Funds. One of which is the offer rate on Reverse Repo Transactions!
11/Which finally brings us to the almighty NY Fed Reverse REPO weekly ATH chart at $2.57T - hide the women and children.
12/For some perspective we'll overlay the Reverse REPO balance and TGA with a dashed line at a key inflection point.
13/So banks have all these excess reserves. It must be because the stingy bastards are getting a great deal from the Fed and not lending, right? right? Here's the eyewatering rate earned in a Reverse REPO transaction the past 2 years.
14/Refer back to mentioning using the offer rate on Reverse REPO to maintain Fed Funds Rate absent OMO. This is Fed Funds upper bound and Overnight REPO rate.
15/Back to the stingy bastards at the bank not lending. Bank Credit has been printing ATH since the end of cold and flu season.
•Bank Credit Total
•Bank Credit: Real Estate
•Bank Credit: Consumer
16/C'mon there's gotta be a nefarious reason this Reverse REPO balance is so high. Here is every interest rate I am aware of that matters in one tidy package, thank you @TheTerminal For reference I've highlighted TBill rates, note them in relation to RRP.
17/This is a very crude oversimplification of why Reverse REPO's are still printing ATH. The Fed is conducting as little QT as possible for what I think may be sound reasons. It will increase in September and I expect Reverse REPO may fall.
18/If you follow @Fullcarry @LongTplexTrader @LONGCONVEXITY @EffMktHype @FedGuy12 and other experts in this field (and if you are not, you are doing it wrong) you will understand this better than me. I hope they will criticize and highlight what I've missed so we all get better.
19/My apologies for bursting any Fed conspiracy bubbles. Do not despair the Fed is up to other interesting potentially very nefarious things that matter more than RRP such as Project Hamilton and Central Bank Liquidity Swaps.
Bring the heat, I can take it.
Share this Scrolly Tale with your friends.
A Scrolly Tale is a new way to read Twitter threads with a more visually immersive experience.
Discover more beautiful Scrolly Tales like this.