Fed offers $1.5T in repo market

Discussion in 'Fixed Income' started by kmiklas, Mar 12, 2020.

  1. kmiklas


    This is not quantitative easing.


  2. bone

    bone ET Sponsor

    No, it’s really not. But it’s a direct consequence of QE-1,QE-2, QE-3, and the tightened banking regulations and stress testing post-2008.

    Overnight lending between banks has dropped 70% since the financial crisis - so the Fed has to do it. Which the Fed eventually learned. Eventually.

    kmiklas likes this.
  3. kmiklas


    Good to have you here, bone. I've been feeling a little lonely here in the new Fixed Income forum.

    So let me get this straight. The Treasury offers more bonds. Banks don't have cash on hand to buy them, so they borrow cash using Treasury bonds as collateral in a repurchase agreement (Repo). Lately, per your comment, banks have been lax to lend cash, so the Fed creates another 1.5T in cash, and serves as the counterparty on the repo, so that investment banks can buy and resell more Treasury bonds.

    This seems a little incestuous. :confused:
    bone likes this.
  4. bone

    bone ET Sponsor

    Well, incestuous and the law of unintended consequences. And very misleading clickbait headlines about the Fed pumping. And it is entirely of the Fed's own construction. They broke it and they own it.

    During QE-1, QE-2, and QE-3 the Fed buys massive amounts of US Sovereign paper on the primary and secondary dealer network. So, the very collateral that banks require for inter bank overnight and short term lending to each other for cash flow purposes becomes more rare courtesy of the Fed. So, fantastic - the Fed bought up massive amounts of the very collateral that banks need in order to lend to each other.

    Post Financial Crisis, the Fed creates the most stringent commercial banking stress tests on planet Earth. New debt to equity and risk to equity ratios are promulgated in regulation for commercial and investment banks. At present US banks have become very risk averse. So as a result, bank to bank repo lending has dropped 70 percent as compared to pre-2008 levels. This is a fact.

    So, the Fed has belatedly come to the realization that they themselves are now going to be the inter bank lender and routine liquidity provider. Because they blew out the bank to bank Repo facility more or less.