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THREAD: It’s been a decade since Fed traders jumped into U.S. money markets to inject cash and keep short-term interest rates (repo rate) from rising.
Confused? It's ok. Even traders were left scratching their heads.
Here’s exactly where things stand➡️bloom.bg/2lXlCSt
Confused? It's ok. Even traders were left scratching their heads.
Here’s exactly where things stand➡️bloom.bg/2lXlCSt
Before we start:
➡️Repo rate = Cost to borrow short-term cash (often overnight) in money markets, which is secured by collateral
➡️Money markets = Where traders can lend & borrow cash for short amounts of time. That’s different from the capital markets (bonds and stock markets)
➡️Repo rate = Cost to borrow short-term cash (often overnight) in money markets, which is secured by collateral
➡️Money markets = Where traders can lend & borrow cash for short amounts of time. That’s different from the capital markets (bonds and stock markets)
On Tuesday, the NY Fed injected $53 billion into the money markets to push the repo rate down. Rates had spiked as high as 10%.
On Wednesday, after that repo rate started to move up again, the NY Fed injected $75 billion to the money markets bloom.bg/2lXXU8v
On Wednesday, after that repo rate started to move up again, the NY Fed injected $75 billion to the money markets bloom.bg/2lXXU8v
Why did the Fed have to step in and what drove rates up? We’re not 100% sure why but there are a few theories.
One is that there was a reduction in the supply of cash ready to be lent…the same time there was an increase in demand. That pushed prices up⬆️
One is that there was a reduction in the supply of cash ready to be lent…the same time there was an increase in demand. That pushed prices up⬆️
Why was there so little cash on hand? 💸
The Treasury issued more bonds than people expected AND there was a big corporate tax payment on Monday.
That meant there was less money on hand to lend out in these active money markets
bloom.bg/2lXlCSt
The Treasury issued more bonds than people expected AND there was a big corporate tax payment on Monday.
That meant there was less money on hand to lend out in these active money markets
bloom.bg/2lXlCSt
Why is it a big deal that the repo rates spiked?
If left unchecked, the escalation in rates could do damage to the broader economy by hiking borrowing costs for companies and consumer 📉
If left unchecked, the escalation in rates could do damage to the broader economy by hiking borrowing costs for companies and consumer 📉
Another note: Timing is bad because Fed leaders are at a policy meeting and are expected to cut the target rate by a quarter point.
The money-market problem threatens to overshadow the cut & Wall Street wants to know what Fed might do to fix the situation bloom.bg/2kjBBJU
The money-market problem threatens to overshadow the cut & Wall Street wants to know what Fed might do to fix the situation bloom.bg/2kjBBJU
The moves in the repo rate underscored just how deep the structural problems are.
There is often not enough cash on hand at Wall Street firms to meet the funding demands of a market trying to absorb record Treasury bond sales, which are needed to cover U.S. budget deficits
There is often not enough cash on hand at Wall Street firms to meet the funding demands of a market trying to absorb record Treasury bond sales, which are needed to cover U.S. budget deficits
The solution? Longtime observers say the Fed would need to continue to inject cash on a regular basis.
Stay tuned for today’s Fed meeting and statement for more information--if they offer any.
Here's a bit more for context ➡️ bloom.bg/2lXXU8v
Stay tuned for today’s Fed meeting and statement for more information--if they offer any.
Here's a bit more for context ➡️ bloom.bg/2lXXU8v
Follow @boes_ and @mccormickliz for more too!
