- Repocalypse 2.0 On Deck? “Turn” Repo Rates Are Blowing Out
by Tyler Durden, https://www.zerohedge.com/
Earlier today, repo market icon Zoltan Pozsar scared the living daylights out of cross-asset traders everywhere with what could be called a doomsday prediction in which the former NY Fed and Treasury staffer warned that as a result of collapsing systemic liquidity and a drought of “excess reserves”, the coming days could see a lock up in the FX swap market (in the process sending the US Dollar soaring), which would then translate to a violent deleveraging of massively levered hedge funds, and a liquidation first in the bond then stock market.
Yet while Pozsar had seemingly no concerns staking his hard-earned reputation on the outcome of a potentially catastrophic event that would subsequently be used by the Fed as a catalyst for QE4, he was far less confident about “when” it would occur:
it’s hard to have a definitive answer: it depends. It depends on how equities do, which depends on the trade deal and other random tweets. It depends on how auctions go, which depends on the equity market and the curve slope relative to actual funding costs.
Still, now that the genie is out of the bottle, everyone will become a cross-asset expert, trying to isolate even the smallest notable deviation from the norm as the horseman of the coming market apocalypse, and focusing first and foremost on the most direct indication that something is (again) broken in the repo market: the overnight general collateral repo rate.
A very different picture however emerges when looking at forward, or “turn” repo rates, those that capture the year-end interview of Dec 31-Jan 2 (hence “turn”), where the past month has seen a sharp, consistent increase in repo rates, which peaked in the past two days around 4.10%-4.20%.
And this is where things get interesting: if Pozsar is right, nothing the Fed announces on Thursday short of QE4, will help relieve the pressure on the “turn” into year end, which the Credit Suisse strategist sees rising ever higher, until it forces dealers to freeze either the FX swap market, or the repo market, or – devastatingly – both. Everything else would, or perhaps should, be ignored by the market as the reserve hold in the financial system is massive and growing by the day as the Fed’s T-Bill QE failed to plug the liquidity drain.
So who will be right: Pozsar, and his fatalistic forecast for a market crash in the coming days (that triggers QE4), or Skyrm’s cautious optimism? The answer will be revealed by the “turn” repo rate: if it resumes rising, and hits 5%, 6%, 7% or more, then all bets are off.