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Repo dealers have been reluctant to lend. Institutions that have bonds on their balance sheet and need cash come to the dealers but can't get a loan at a reasonable rate despite having good collateral. In order to help the market and lower the repo rates the Fed engages in the reverse repo...

Bob, I was making a quip about "sane for most of 2000" :)

Were you? :)

In fairness, we did get a decrease in liquidity and it's natural for a market maker to decrease his quote sizes when his inventory risk goes up.

by illegal aliens from Mars!

Liquidity is an illusion. It's always there when you don't need it, and rarely there when you do.

The guys who do make money most of the time are the higher frequency guys that buy order flow from the retail and usually have very little positions at the end of each day. That's a heavy duty technology business and it's very hard to get involved there. "Real" market makers do take meaningful...

That would be me, but somehow I don't have any feels to grab. In fact, I did not even exit all of PA equity positions in Feb nor did I sell my 'coins (have no idea what's going on in that market, but it's only 6 bitcoins). This said, I started re-allocating to cash + govies starting in late 2018...

Well, someone bought vol and someone sold vol. An options market maker is in the middle, transferring risk for a fee. This said, some of them did pretty poorly in this disaster - for example, a few Chicago firms (for instance, C*** T*** and B********) blew up and had their positions liquidated.

Do you really think market makers are holding on to all that gamma you sold? Most OMMs naturally have a short gamma bias since they are the first ones to see the flow and can quickly turn the position around. Some dude out there that bought the vol you've sold (me, for example) right now is...

Did you get a blowjob as a thank you?

Ze VIX! It's green and comes in gallon jars!

No, but lack of cash reserves and inability to refinance their debts would easily do it.

I still do not see how does lack of desirable collateral translate into higher repo rate? If everyone is flush with cash, has balance sheet aplenty and wants those very bonds on their balance sheet, the rate should be below unsecured. We saw the opposite. P.S. dealers did complain about lack of...

Yes, thanks to the Fed repo intervention. The issue we are describing here was repo rate being abnormally high (e.g. in Sep 2019 we saw it hit 5% and some printed at 8% or higher). I don't see how that could be attributed to lack of available collateral as per your logic.

A repo dealer is lending cash for a fee and takes bonds as collateral. If he cranks up the repo rate, that means he is less willing to (a) part with cash and (b) take bonds as collateral.

As I said, I don't follow your logic. Repo rates are high, meaning borrowers have to pay up to give collateral and there is lack of desire on the lenders side to take said collateral on their balance sheet.

Bonds, obviously and they still have a bunch on their balance sheet. That actually reduces the overall supply and should make primary dealers more willing to take bonds on their balance sheet via repo. So I don't follow.

I am not sure I follow. What are the exact mechanics that relate QE with the repo liquidity issues in your opinion?

It's because of the balance sheet costs and related funding issues. CDS/bond basis is a fascinating subject that has taken down several large hedge fund managers. Actually, recovery assumptions are a bit easier to figure out for a bond. Single name CDS have a deliverable basket in a similar way...