Watching REPOs By The Fed

As some of you may have read, or maybe I am the only one watching, the FED has announced giant sized REPO moves for the balance of the year.

I have been watching since September and the FED has done overnight repurchase agreements in the $50 to $75 billion area mostly–tossing in $15-$25 billion in 14 day repurchases agreements every 2 weeks.

Of course this is to provide liquidity to the banking system after a ‘blow out’ overnight lending rate spike of near 10% on September 15th.

Now we are 90 days later and the FED has announced they will be taking the the overnight operation to at least $150 billion. Yikes!!

I am of the thought now that this is all out on the table we will likely avert major issue—BUT there is a chance of a misstep–in particular in light of the fact that no one really seems to fully understand the market workings (certainly I don’t under stand it).

The point being is that we could see disruptions in the next 3 weeks–through the end of the year and no one should be surprised it something “breaks”.

The FED Statement of operations for the next month can be read here.

32 thoughts on “Watching REPOs By The Fed”

    1. Nomad–this weekend and Monday are the 1st test–repo for today (Friday) was normal–now we’ll see what comes Monday morning.

  1. We are now on course for a perpetual and infinite rise in the Fed’s balance sheet. Hard to see how they can get off the merry go round now. But, none of this matters until the bond vigilantes come out of hibernation and drive interest rates higher by flooding the market with more treasuries than the Fed can buy. My guess is this won’t happen until the next recession when the Fed will already be ramping up asset purchases bigly. At that point, if bond vigilantes add fuel the fire, the Fed could be overwhelmed. The level of money printing required to sop up all the supply will spark inflation and weaken confidence in the fiat USD, driving rates higher.

    That’s when you’ll want to own gold for a low growth, high inflation environment. You’ll also be very glad you own some high quality fixed to floating preferreds or Canadian resets.

    1. Would be nice to be on the right side of that trade when that happens. But if you’d been preparing for a crash ever since it was first predicted, you would’ve missed out on a lot of opportunity. Getting caught in an occasional bear market may cost less than missing years of gains.

      1. The Fed can buy and buy. On a relative basis they own peanuts compared to the Japanese “Fed”. Bank of Japan owns more assets than their countries GDP. And also holds 45% of the countries debt. And they still cant make 2% inflation happen. Ok, I confess, I dont have a clue what will happen next.
        That being said, I still like my resets, adjustables, and term dated issues, too!
        I dont watch the entire preferred market, but some have recently drifted down while others are moving back up. Most of mine are in the drift up mode. SR-A which I bought a boatload in 26.30s very recently already is back to 26.86. I normally would flip, but I am trying to make this a core hold, but I have flipped it so much for easy money, its hard. The only one that has dropped for me is EP-C (though most of that was exD). Still I couldnt help myself today buying more at $49 flat today.

        1. Grid, that’s a good point about Japan but it’s not just the size of the balance sheet but the speed at which it grows. I think we’ll have something approaching MMT in the next recession (to fund something like Medicare for All which will be necessary to bailout state government pensions) and that will be the cue for inflation. In the meantime, we likely have the japan-ification of the economy which actually means lower rates rather than higher. The other aspect that is more uniquely japanese is their declining demographics which keeps inflation contained. US population is still growing so it’s easier for inflation to take hold.

        2. Grid: Aren’t you worried that SR-A will be called and you’ll be out $1.86 a share? The 1st call date was 5-21-19.

          1. Derek, you must be mistaken as the call date for SR.A is 8/15/2024…
            Wishing you profitable investing, Nomad

      2. Martin, that’s why I use technicals for timing. I don’t try and predict when any of this will play out but I don’t need to because the charts will tell me when it’s happening.

    2. Landlord–just checked the balance sheet and they added $30 billion in the last week. I believe you are right that it looks to be perpetual–they are going to have to monitize a big chunk of debt.

      1. Tim, not only have they added $30B in a week but they have now added back half of everything they rolled off during QT. What took many months to roll off has been added back in less than a quarter. At this rate the Fed balance sheet will be at all time highs by the end of Q1 and then it’s to infinity and beyond.

        1. This isnt surprising. I remember the discussion here early on Tims site, when Fed said they setting a lower amount held. I said no way, the majority of this is getting monetized. Then later they raised the bar. And of course the balance is largely immaterial now. Its been monetized.
          Long time ago on a planet faraway, deficits were assumed to cause inflation and higher interest rates.

  2. Sold all VNOPL at 25.08,
    MBINO at 25.70
    I’m at 75% cash and equivalents
    No surprises, no alarms please….Radiohead

    1. Pretty interesting article L. I looked at the part on Who’s funding Uncle Sam. Foreign investment has flat lined for years but is decreasing quick as a percentage of the total. Fed attempting to hold down rates with less demand worldwide?

    2. Nice article! Thanks. I’ve followed Robert Balan for awhile regarding liquidity trends and same slant from a second source.
      Seems to be an element of Too Big to Foil with pressure to deregulate big inter-bank lending as an excuse for the Fed to be heroic SuperDupers. Usually news is not a big determinant for me, but this is a long term trend not news.
      PS: I like the edit counter which makes me reread/edit and fat finger corrrekt!

  3. I’m not sure I believe their story of why they started this. I have a feeling it has to do more with 1 or more banks in Europe that are in trouble. DB. Has trillions in dirivitives and we are at all time highs in margin. When this breaks the market will take the elevator down. Be careful out there. Thanks for your work Tim, ATB

    1. Tim H–DB has been a problem for 10 years–not sure why they can’t get a fix–that is a scary, derivative filled bank.

  4. I won’t pretend I understand what’s going on, but isn’t this REPO rate what was proposed to replace LIBOR in calculating floating rates on some of our preferreds? Or do I have it confused with something else.

  5. Banks invested billions in treasuries, trying to frontrun the next round of QE. But since we had “not-QE” treasuries didn’t go up. Now the banks don’t have enough reserves. FED is loaning them the money to indirectly own treasuries and so they don’t sell at a loss. Banks didn’t use the first rounds to solve the problem so now they need more money.

    There is also a problem with hedge funds, though that is more complex and mysterious.
    And the biggest concern. The FED may be bailing out European banks and trying to keep it hush-hush.

    1. Martin G–yes I am in the camp that believes there are issues somewhere that we do not know and they are trying to ‘fix’ it behind the scenes without creating a panic–I guess sooner or later we’ll find out.

      1. Friday the 13th as well, and yep…My feral cat that i feed in the backyard is black.. I am on red alert Tim. Your words in BOLD TYPE concerns me.
        Are there any precautionary actions we can take?
        I think if the market tanks, it will hurt all pref issues equally.
        I will try to get to 75% cash and equivalents in a week or so.

        1. Newman–not much you can do–just don’t want anyone saying ‘what the hell is going on’. One should have a little dry powder to be available if bargains arise.

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