- Top Repo Expert Warns Fed Is Now Trapped: “It Will Take Pain To Wean The Repo Market Off Easy Cash”
by Tyler Durden, https://www.zerohedge.com/
Yesterday we reported that with the Fed’s first oversubscribed term repo in three weeks…
… coupled with a surge in amount of overnight repo submission, indicated that the funding situation in the repo market had again deteriorated sharply, which was odd since we are now two weeks into the new year and further away from the time when the repo market was supposedly in distress due to the year-end funding constraints.
Indeed, something appears amiss, because as Curvature Securities’ Scott Skyrm writes in his daily Repo Market Commentary note, the total overnight and term Fed RP operations on Friday were greater than on year end! On year-end, the Fed had pumped a total of $255.95 billion into the market verses $258.9 billion on Friday.
The problem with the broken repo market and the Fed’s respective Repo operations, similar to the problem observed with QE and the Fed’s balance sheet in general over the past decade, is that the market had gotten addicted to the easy Fed liquidity unleashed in September (via temporary repo ops), and then again in October (via permanent T-Bill purchases).
As Skyrm writes, “it’s easy to see how the Repo market can get addicted to easy cash from the Fed when the stop-out rates for the RP operations are 1.55% – behind the offered side of the market.” But, as the repo strategist adds, as the Fed keeps injecting cash, the market gets used to it.