I am not sure I follow. What are the exact mechanics that relate QE with the repo liquidity issues in your opinion?
The Big Short 2: Repo Markets
- Thread starter Pekelo
- Start date
What was the US Federal Reserve buying en masse during QE-1, QE-2, and QE-3 ??
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.
If you are a bank and you want to borrow overnight on the Repo market - you have to post US sovereign debt as collateral. That's the basis for the Repo agreement. Pretty tough for a bank to borrow on the Repo market when the Federal Reserve is holding a big chunk of the securities required for a Repo agreement. As I said - this is 100% the Fed's own doing.
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.
specifically, where on Earth did you get that idea ?
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.
SOFR has been going down as of late.
https://www.newyorkfed.org/markets/treasury-repo-reference-rates
https://www.newyorkfed.org/markets/treasury-repo-reference-rates
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.
Look at where the actual Bank Reserves were in September of 2019. (Hint: they were very low and fixed income dealers had been warning the Fed about the lack of securities liquidity for months)