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This Wasn’t Supposed To Happen: One Day After Fed Rate Cut, Repos Signal Record Liquidity Shortage

March 4, 2020

This Wasn’t Supposed To Happen: One Day After Fed Rate Cut, Repos Signal Record Liquidity Shortage

Yesterday morning, when we discussed the sudden spike in liquidity shortage that resulted in both a (record) oversubscribed term repo and the first oversubscribed overnight repo since the start of the repo crisis, we said that “if going solely by the amount of securities submitted between the term and overnight repo, the overall liquidity shortage today was nearly $180BN, the highest since the start of the repo crisis, and a clear signal to the Fed that it needs to do something to further ease interbank lending conditions.“

Less than an hour later the Fed cut rates by 50bps in its first emergency intermeeting action since the financial crisis.

So with its emergency action now in the rearview mirror, did the Fed manage to stem the funding panic that has gripped repo markets following last week’s market bloodbath? The answer, if based on the latest overnight repo results, is a resounding no.

Moments ago, the Fed announced that its latest repo operation was once again oversubscribed, with the full $100 million amount of repo accepted.

In other words, for the second day in a row the overnight funding repo operation was oversubscribed (and it is safe to say that tomorrow’s term repo will be oversubscribed as well).

…click on the above link to read the rest of the article…

Interbank Rates Starting to Rise – Monetary Crisis is Beginning

March 15, 2018

Interbank Rates Starting to Rise – Monetary Crisis is Beginning

 

Extremely reliable sources from Behind the Curtain in Europe are becoming deeply concerned that Draghi at the ECB has created a monumental economic disaster he is just praying to holding off until he leaves next year. Interest rates are already starting to rise significantly in several important money and interbank markets. Both banks and debtors are facing a rapid rise in interest expenditures that will shock the world. This is going to blow-out budgets around the globe and both private and public debtors face higher costs of funds.

The Libor (London Interbank Offered Rate), the most important reference rate for the global interbank market, is currently at its highest level since 2008. We elected a Yearly Bullish Reversal on the close of 2016. Once we see the rate close above 213 on a monthly basis, LIBOR rates will be poised to jump to 510. When the Libor price rises, the short-term borrowing for banks becomes more expensive, and for borrowers in the financial market, such as sellers of bonds or buyers of mortgages, debt service becomes more difficult. The demand for debt is exceptionally high. We are looking at LIBOR rates rising sharply. The dollar-lending rate for dollar loans has been rising steadily in all maturities since about the end of 2014. The dollar-Libor for three-month loans in March 2017 were trading at around 1.1%. Currently, this dollar-Libor rate stands at around 2%.

This year’s WEC will be focused on the next major crisis and how all the markets will interact. This is the beginning of the Monetary Crisis Cycle. Our Yearly Models on LIBOR are already in a bullish posture on both short-term indicators. A closing on an annual basis above 208 will signal rates will rapidly more than DOUBLE into 2020. A closing above 510 on an annual basis will warn of a MAJOR financial crisis hitting just about every economy.

Interbank Market Collapsing

March 9, 2018

Interbank Market Collapsing

QUESTION: Mr. Armstrong; Has interbank lending collapse due to a lack of confidence concerning counter-party risk?

Thank you for being a rare source with experience

ER

ANSWER: Yes that is a correct statement. The failure of Lehman and Bear Sterns was the result of interbank lending when they could not make good on the collateral they posted the day before in the REPO market. Then we had the collapse of MF Global, which was also a loss linked to the overnight markets. Now mix in the LIBOR scandal and banks were scrutinized for manipulating LIBOR rates in the interbank market.

The interbank lending market is a market in which banks extend loans to one another for a specified term, typically 24 hrs. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate (also called the overnight rate if the term of the loan is overnight).

The collapse of this market is a clear warning that liquidity is extremely vulnerable. When crisis strikes, liquidity will simply vanish entirely. This warns that volatility will rise sharply and it appears to be predominantly focused in on the debt market.

Lynette Zang: ‘The CRIMINAL BANKS Know Something Is VERY WRONG’

February 15, 2018

Lynette Zang: ‘The CRIMINAL BANKS Know Something Is VERY WRONG’

lynettezang

Lynette Zang from ITM Trading recently joined the SGT Report to discuss the economy, precious metals, and the disastrous storm that’s brewing. According to Zang, the criminal banks have stopped lending to each other because they know something is very wrong with the economy.

The interview jumps straight to the point.  The big banks are not lending to each other.  What is Zang’s take on the drop in interbank lending?

“During the 2008 crisis, it absolutely plummeted but they’ve been trying to keep it a little supported at the levels back in the 80’s and…it’s plunged below where it was when they came out in ’73; and what I find interesting…is that banks don’t trust each other. They know they’re insolvent. They’re not gonna get the money back.”

Zang is then asked about Deutsche Bank.  Since it’s leveraged “to the gills” is it the first bank to go?

“I don’t know whether Deutsche Bank will be the first to go, but their leverage ratio remains at 3.8%, which means if the value of their assets falls 3.9%, they are insolvent. But that can really start anywhere. It doesn’t have to start at Deutsche Bank, but Deutsche touches every single financial product in every bank. I wouldn’t say this is ‘the canary in the coal mine,’ because I’ve really been talking about pattern shifts that I’ve been witnessing since October. The pattern shifts really started in 2017. People think nothing happens until it becomes visible, but you have to look a little below…to see what you’re not seeing…the banks know that they’re not loaning to each other. And the central banks know that they’re attempting to support the mortgage markets and keep everything floating.

We’re inside of a great experiment…this is an accident that’s in the process of unfolding.“

…click on the above link to read the rest of the article…

Interbank Loan Series Update: Message From “Fred”

February 14, 2018

Lots of people, including me, were wondering what happened with interbank loans. The series is now discontinued.

This post is in reference to my previous article Plunge in Interbank Lending: The Straw that Broke the Fed’s Back.

Here is an email a reader Andy sent from the Fred team.

Dear user,
There have been some structural changes to that data in addition to the corrections.
More information can be found at https://www.federalreserve.gov/feeds/h8.html
The Interbank Loans have been discontinued and we are confirming the validity of the last value in that series.

Sincerely,
FRED Team

FRB: DDP: Assets and Liabilities of Commercial Banks in the United States (Weekly) (H.8)
The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.
www.federalreserve.gov
FRB: DDP: Assets and Liabilities of Commercial Banks in the United States (Weekly) (H.8)

The chart has been updated one last time, removing the plunge.

Reverse Repo Adjustment

Reader Parker commented:

Through the end of 2017, the Fed tracked “interbank loans” which included “Fed Funds and reverse repos with banks” and “loans to commercial banks”; starting in 2018, the Fed is now tracking “Federal Funds and Reverse Repo” for bank and non-banks together (one number) and breaking out “Loans to commercial banks separately”; as a consequence, it looks like the chart you showed basically had the Feds data feed of Fed Funds and Reverse repo with banks + loans to commercial banks through 12/31/17 and subsequently it is only picking up “loans to commercial banks” because “Reverse repo with banks” is no longer reported as a standalone. I track the Fed H8 report every week which is why I noticed the change in reporting classifications across years.

Fed Funds and Reverse Repo is getting tighter which is still news worth but it didn’t suddenly drop by 90% in a week.

Please let me know any questions – best, Parker

Tightening Analysis

My analysis stands as to what is happening even though the previous chart is inaccurate. Note the lead-in chart for this article. Securities in bank lending took a sudden dive.

My overall message stands as previously delivered, just not the chart itself.

Apologies for the error.

Plunge in Interbank Lending: The Straw that Broke the Fed’s Back

February 13, 2018

Interbank lending took a historic dive. Readers ask “What’s happening?” Let’s investigate.

Interbank Lending Long Term

The plunge in interbank lending is both sudden and dramatic. What’s going on?

Fed Tightening Two Ways

The short answer is a straw broke the Fed’s back.

A more robust explanation is the Fed is tightening two ways: The first by hiking, the second by letting assets on the balance sheet roll off.

Both measures have a tendency to push up long-term interest rates. This is another explanation for the long-end rising. Despite conventional wisdom, inflation and wages have little to do with it.

We can see the effect in other charts.

LIBOR

Year-Over-Year M2 Growth

Money supply growth is falling as are excess reserves.

Excess Reserves

The Fed started balance sheet reduction in October of 2017. Unwinding the balance sheet escalates greatly in 2018.

  • The treasury unwind started at $6 billion per month, increasing by $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
  • The mortgage debt unwind started at $4 billion per month, increasing in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

Does the Fed Know What It’s Doing?

Janet Yellen answered that question directly in her speech A Challenging Decade and a Question for the Future, at the Herbert Stein Memorial Lecture National Economists Club on October 20, 2017.

The FOMC does not have any experience in calibrating the pace and composition of asset redemptions and sales to actual and prospective economic conditions. Indeed, as the so-called taper tantrum of 2013 illustrated, even talk of prospective changes in our securities holdings can elicit unexpected abrupt changes in financial conditions.

…click on the above link to read the rest of the article…

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