The Fed hiked the rate it pays on reverse repo from 0 to 0.05% last week. While this sounds tiny, it has already pulled in $235bn. What are the implications?
Low Yields in 5 year Note auctions are lower by about 60 basis points since March. This indicates that the UST shortage is spreading to the rest of the curve!
Skyrocketing use of reverse repo with the Fed is a matter of collateral scarcity. Is this corroborated by investor demand at US Treasury auctions?
If you were offered an investment that returns -0.70% after two years, would you take it? No! Yet that’s what German 2 year bonds are trading for. Why?
With markets & leverage at extraordinary levels, sky high reverse repo takeup is another sign that the financial system is vulnerable to shock. Caveat emptor!
Takeup of the Fed’s Overnight Reverse Repo facility has surpassed its Covid high, reaching ~$300 bn in the last 3 weeks. Why the sudden & dramatic increase?
Are recent acute liquidity problems in the Treasury market due to recent narratives focused on inflation? Or is there something more going on, like in repo?