Treasury Repo Rates Go Negative — Now What?

Hey There Income Hunters,

I told you in March that Janet Yellen at the Treasury had $800 billion burning a hole in her pocket … 

So, she stopped issuing new bills and let the redemptions of maturing bills flow back to investors … 

We flagged how this would flood the banks with deposits and that bank rates could go negative.

Well, now they have.

Today you can pay someone to borrow your money. Is that something that would interest you?

I knew this would start in the Treasury repo market and we’ve had two closes in a row at negative rates … 

Chart courtesy of DTCC

DTCC is the parent of the National Securities Clearing Corp. (NSCC), which clears all stock transactions, and also for the Fixed Income Clearing Corp. (FICC), which clears all Treasury securities

DTCC publishes daily Treasury Repo Rates and you should always check them when volatility spikes and the market is trading nervous …

Because when there are real problems in the system it shows up in the repo market first.

Repo Crisis of 2019

The Fed never saw it coming — and it was under Jerome “J-Pow” Powell’s watch. After that I have never believed a word he’s said … because, as I’ll show, it was happening right in front of him and he did nothing.

The crisis could have easily been avoided.

Out of nowhere in September 2019, repo rates spiked from 2% to 15% causing a massive panic — and cash went from being plentiful to scarce.

That’s how fast market liquidity can disappear!

So, the market was looking for answers and then St. Louis Reserve Bank president, James Bullard came out with this statement:

Something is going on, and that’s causing I think a total rethink of central banking and all our cherished notions about what we think we’re doing. … We just have to stop thinking that next year things are going to be normal.”

WTF?Now you know why I go on rants about the Fed. Check out this chart of the Treasury repo market from September 2018 to September 2019 … 

Chart courtesy of Zero Hedge

Now, where was Powell when rates started to climb in April? Statements were being made like it’s no problem the Fed has it under control …

Then BAM … funding dries up, the market melts down and it’s a full blown crisis.

Allow me to set this up for you … 

The effective Fed funds rate is the rate the Fed’s primary dealer banks lend and borrow from each other overnight. That rate is published every morning based on a weighted average of lending and borrowing activity the previous night.

That is an exclusive bank-to-bank rate. Then you have the repo market which anyone that is a member of the FICC can participate in …

Treasury repo is the lifeblood of the FICC member’s business. They rely on getting their funding by going into the repo market to execute collateralized loans by offering their Treasury securities up for cash. 

Now, this market works very well until bank’s sense trouble brewing with loan defaults or customer insolvencies and then they pull their loans out of the repo market.

This leaves the smaller banks and brokers scrambling for funding … and it doesn’t take long before it expands into a crisis.

What Can the Fed Do Now that Rates Have Gone Negative?

The Fed has a reverse repo product that allows them to take the bonds they have on their balance sheet and execute collateralized loans as the borrower with authorised market participants who hold the excess cash that is pushing rates into negative territory … 

The Fed soaks up the excess cash in the system and allows lenders to bypass the repo market and earn a positive rate on their loan to the Fed.

You can see how much this product has been growing recently with all the cash that continues to be injected in the market …

Chart courtesy of DTCC

Bring It Home

The Fed is great at reacting to a problem and fixing it in the short-run. However, the fixes only work as long as they can keep asset prices rising…

So far, so good, and they can keep telling the world not to worry about inflation. But we Income Hunters will continue to look at the real data like the chart below.

Chart courtesy of Zero Hedge

Inflation is coming and eventually the Fed will have to raise rates — and we’ll continue to crush it in a down market, just as we are in the rally. 

Have a great weekend everyone and as always …

Live and Trade With Passion,


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