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Germany Sells World's First 30-Year Negative Yielding Bond... And It's A Failure

Profile picture for user Tyler Durden
Wed, 08/21/2019 - 07:23

Last night, when we previewed Germany's sale this morning of what would be the world's first ultra-long (30 Year) auction with a negative yield, we said that "traders will closely following the oversubscription rate on the sale, which neared a record low in the July after falling for the last three auctions." And sure enough that turned out to be a rather thorny issue as the bond sale was technically a failure.

Here's what happened: on Wednesday morning, with its entire yield curve below zero and the yield on the 30Y auction assured to be below zero, a reflection of dwindling expectations for inflation and growth over the coming years and ahead of the ECB's relaunch of QE next month - Germany was hoping to sell some €2 billion in bonds maturing 2050. However, with bond yields rising sharply into the auction, with the yield on the German 30Y rising from -0.18% to as high as -0.10%, demand suddenly slumped.



And so, when the dust settled, it turned out that Germany had managed to sell just €824 million of the total €2 billion target at a record low yield of -0.11%, with the Bundesbank forced to retain almost two-thirds of the entire issue as demand plunged. In other words, this was basically a failed auction.


Thanks to the central bank's intervention, the bid-to-cover ratio was just barely above one, or 1.05 times, versus 1.07 times for the previous sale of similar maturity bonds on July 17, while the real subscription rate - which accounts for retentions by the Bundesbank - fell to 0.43 times against 0.86 times at the previous auction. Anything below 1 indicates that there is no real market demand for the entire issuje.

“It is technically a failed auction,” said Jens Peter Sorensen, chief analyst at Danske Bank AS. “I am not all worried about this -- as investors can always just buy in the future and do not need to participate in auctions.”

He may not be worried, but the optics are certainly not pleasant. Worse, it means that a disconnect may be forming between the primary (auction) and secondary market, where foreign investors are willing to send yields to record lows in the open market but stay quiet at auction, resulting in a potential air pocket between market and auction prices.

As Bloomberg adds, Commerzbank AG had expected demand to come from life insurers and macro investors before the sale. It failed to materialize.

Which begs the question: will this mini buyers strike for the historic auction be the catalyst that sends yields sharply higher? So far, it has not - despite the poor demand, the yield on the bonds dropped as low as -.13% after the auction, and was trading at -.117% last, suggesting that buyers are less worried about the failure and more worried about what happens to the European economy in the future.

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Germany sells nearly $1 billion of 30-year negative yielding bonds

Published: Aug 21, 2019 7:29 a.m. ET







Getty Images

Olaf Scholz, Germany’s finance minister

Germany sold 30-year bonds at a negative yield for the first time, in another sign of how investors’ desperation for safe assets is inflating their value.

The bond, set to mature in August 2050, has a zero coupon, which means it pays no interest at all. Yet investors were still willing to pay more than face value to buy €869 million ($965 million) worth of the debt, pushing the overall yield on the bond TMBMKDE-30Y, +16.12%   into negative territory, at minus 0.11%. Yields fall as bond prices rise.

The German sale adds to the roughly $15 trillion of negative-yielding bonds outstanding world-wide, many of which are from European governments or are state-sponsored agency bonds. It also adds to the smaller—but still significant—amount of new bonds that have been sold with a negative yield at issue.

More than $3 trillion of bonds have offered a negative yield when they were first sold since 2016, according to data from Barclays . While this is mostly government and agency debt, it also includes more than $11 billion of corporate debt, from companies such as French drugmaker Sanofi SA and German consumer goods group Henkel AG .

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11 minutes ago, Butifldrm said:

Germany sells nearly $1 billion of 30-year negative yielding bonds


People are willing to put their money down for 30 years with zero return... What does that tell you?



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The British central bank calls for an end to the world's dependence on the dollar

09:11 - 24/08/2019

Information / follow - up .. 
called on the British Central Bank Governor Mark Carney, Saturday, to get rid of the dependence on the dollar and unify the central bank 's efforts to find an alternative reserve currency. 
Carney told a conference of central bankers in Wyoming that the dollar's dominance in the global financial system was raising the risk of what he called a "liquidity trap," a very low interest rate and weak economic growth. 
“With the reorganization of the global economy, the importance of the US dollar remains as it was in the period when the Bretton Woods system collapsed” (ie, the decoupling between the dollar and the price of an ounce of gold in the 1970s). 
Developing economies have increased their share of global financial activity to 60 percent, from 45 percent before the financial crisis 10 years ago, Carney said.
The dollar is still used in about half of international trade, more than 5 times the US share of global exports, making many countries vulnerable to the volatility of the US economy. 

Carney added that the problems in the global economy are related to activating protectionist and populist policies. 
The governor of the Bank of England argued that the best solution would be to create a diversified multipolar financial system, which can be achieved with the help of contemporary technology. He suggested that it is possible to use cryptocurrencies for this purpose, which will reduce the impact of the dollar on global trade. Finished 25 T.

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26 minutes ago, Butifldrm said:

The British central bank calls for an end to the world's dependence on the dollar

09:11 - 24/08/2019

Information / follow - up .. 
called on the British Central Bank Governor Mark Carney, Saturday, to get rid of the dependence on the dollar and unify the central bank 's efforts to find an alternative reserve currency. 
Carney told a conference of central bankers in Wyoming that the dollar's dominance in the global financial system was raising the risk of what he called a "liquidity trap," a very low interest rate and weak economic growth. 
“With the reorganization of the global economy, the importance of the US dollar remains as it was in the period when the Bretton Woods system collapsed” (ie, the decoupling between the dollar and the price of an ounce of gold in the 1970s). 
Developing economies have increased their share of global financial activity to 60 percent, from 45 percent before the financial crisis 10 years ago, Carney said.
The dollar is still used in about half of international trade, more than 5 times the US share of global exports, making many countries vulnerable to the volatility of the US economy. 

Carney added that the problems in the global economy are related to activating protectionist and populist policies. 
The governor of the Bank of England argued that the best solution would be to create a diversified multipolar financial system, which can be achieved with the help of contemporary technology. He suggested that it is possible to use cryptocurrencies for this purpose, which will reduce the impact of the dollar on global trade. Finished 25 T.

Thanks for this. Very telling...

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On 8/24/2019 at 8:31 AM, Butifldrm said:

The British central bank calls for an end to the world's dependence on the dollar

Might work for bank transaction but, it never happen with the public. Just ain't gonna happen...

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China will work very hard to see that Trump isn't re-elected.....the trade deal was complete....and they backed away.....why?


History indicates that Biden is "China Friendly"......and it appears Biden is the DNC's "chosen one" this time around...


So China will wait....taking the hit now in hope of an easier road in the future.....


Make no mistake though....they will do anything....and everything ...possible to see that Trump doesn't get re-elected.....the clock is ticking.....the war is on....


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Could cryptocurrency dethrone the dollar?



Bank of England Gov. Mark Carney believes that virtual currency is likely to replace the dollar as ‘king of the foreign exchange market.’ (AFP/File)

Updated 01 September 2019


September 01, 201922:03


The greenback is likely to lose its sparkle owing to globalization, economists believe

LONDON: Bank of England Gov. Mark Carney has suggested that a virtual currency, modeled on Facebook’s Libra, could one day replace the dollar as king of the foreign exchange market.

The BoE chief aired vague proposals for a so-called “Synthetic Hegemonic Currency” at the recent Jackson Hole Symposium of central bankers.

Here is a brief assessment of why the greenback is losing its lustre and the outlook for Carney’s proposed new digital currency, which would be supported by major central banks around the world.

The dollar has been the world’s reference currency since the Bretton Woods agreement in 1944, when various key units were fixed to the value of the greenback. It has retained its global supremacy ever since, thanks to the economic and political clout of the US.

“The dominant currency is always that of the world’s biggest political power,” noted Philippe Waechter, head of research at Ostrum Asset Management.

The dollar accounted for almost 62 percent of global foreign exchange reserves in the first quarter of 2019, according to the International Monetary Fund.

The European single currency was second with 20.2 percent, while China’s yuan comprised only 2 percent despite the country’s rise to the rank of the world’s second biggest economy behind the US.

Although the dollar has lost its sparkle owing to globalization and the changing world economic order, gyrations in the US unit still impact economies elsewhere.

“US developments have significant spillovers onto both the trade performance and the financial conditions of countries even with relatively limited direct exposure to the US economy,” Carney said at the recent bankers’ meet in Wyoming.

When the greenback appreciates, so do repayments for many emerging nations because their debts tend to be denominated in dollars. The BoE chief, who steps down in January, added: “In the longer term, we need to change the game.”

The public sector, in the form of central banks, could instead provide the best support for a new virtual currency, according to Carney. “It is an open question whether such a new (cryptocurrency) would be best provided by the public sector, perhaps through a network of central bank digital currencies,” he said.

Yet central bankers and world leaders alike remain anxious over the current crop of virtual currencies because they are unregulated.

US President Donald Trump himself has lashed out at Bitcoin and Libra for being “based on thin air” and having no standing or dependability — unlike the dollar.

Commentators believe Washington is unlikely to allow the greenback to lose its cherished status as the world’s premier reserve currency.

“The United States will simply not allow it to happen without a fight. Nobody in its position would,” said Rabobank analysts.

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20 hours ago, coorslite21 said:

China will work very hard to see that Trump isn't re-elected.....the trade deal was complete....and they backed away.....why?


History indicates that Biden is "China Friendly"......and it appears Biden is the DNC's "chosen one" this time around...


So China will wait....taking the hit now in hope of an easier road in the future.....


Make no mistake though....they will do anything....and everything ...possible to see that Trump doesn't get re-elected.....the clock is ticking.....the war is on....



One more example of China's hope to derail Trump......Don't expect any movement in the peace talks with NOKO...


China backs N. Korea amid deadlocked nuclear talks



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Fed Intervenes in Market to Set its Interest Rate, a First Since the Financial Crisis

The move underscores the risks of the Fed’s new approach to setting interest rates.

ImageThe Federal Reserve building in Washington, D.C.
The Federal Reserve building in Washington, D.C.CreditCreditLexey Swall for The New York Times
  • Sept. 17, 2019Updated 2:00 p.m. ET

The Federal Reserve had to step into financial markets on Tuesday to keep interest rates from rising above its target, the first time the central bank has had to carry out this type of “market operation” since the global financial crisis.

The Federal Reserve Bank of New York had to spring into action to keep the effective fed funds rate in line after it rose to the very top of the Fed’s 2 to 2.25 percent range. The central bank branch announced on Tuesday that it would conduct its first major repurchase market operation since the Fed changed its policy-setting approach during the Great Recession.

But the operation was bedeviled by technical difficulties, forcing the Fed to delay the intervention. It was carried out 20 minutes later than initially planned.

The move came after the overnight rate on Treasury repurchase agreements, which are short-term loans used by financial institutions like hedge funds and banks, surged at the start of the week amid a shortage of dollars. A few factors seemed to give rise to that shortfall: companies withdrew cash from money markets to pay their taxes shortly after the United States Treasury issued a raft of new bonds. That glut of new debt sapped up cash.


The surge in repurchase rates — commonly called repo’s — spilled over to the Fed’s main policy tool, the federal funds rate, driving it to 2.25 percent as of Monday.

Tuesday’s intervention is symbolically important. The central bank decided just this year to keep its balance sheet large enough that it can set its policy rate without active market operations. But this episode suggests that it may not have kept its holdings big enough for that approach to work amid more extreme market conditions.

Banks increasingly hang onto reserves — currency deposits — in part because of post-crisis regulation. Even though the overall amount of reserves in the banking system remains high, with excess reserves at about $1.4 trillion, the cash no longer flows readily to patch up short-term shortages.

That makes market stress like this week’s possible, and means that the Fed can set things right with a relatively small intervention.

“For some time now, we’ve had September 16 circled as the first day of the rest of the repo market’s life,” said Lou Crandall, chief economist of Wrightson ICAP. He said that the recent dislocations suggest that the Fed’s goal of setting rates without fairly regular market operations “may not be realistic.”

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$53.2 Billion In QE Lite: Fed Concludes First Repo In A Decade Amid Liquidity Panic

Profile picture for user Tyler Durden
Tue, 09/17/2019 - 09:32

Update 4: It's over: after a torrid 30 minutes in which the NY Fed first announced a repo operation, then announced the repo was canceled due to technical difficulties, then mysterious the difficulties went away just minutes later, at precisely 10:10am, the Fed concluded its first repo operation in a decade, which while not topping out at the $75 billion max, was nonetheless a significant $53.15 billion, split as follows:

  • $40.85BN with TSYs as collateral at a 2.1% stop out rate
  • $0.6BN with Agencies as collateral at a 3.0% stop out rate
  • $11.7BN with Mortgage-backed securities as collateral at a 2.1% stop out rate.



While the Fed did not disclose how many banks participated in the operation, it is safe to say it was a sizable number. Worse, the result from today's unexpected repo operation, we can now conclude that in addition to $1.3 trillion in 'excess reserves', a Fed which is now cutting rates and will cut rates by 25bps tomorrow, the US financial system somehow found itself with a liquidity shortfall of $53 billion that almost paralyzed the interbank funding market.


Oh, and for those wondering why the Fed did a repo, the answer is simple: it did not want to launch QE just yet. But make no mistake, once repo is insufficient, the Fed will have no choice but to escalate to the next step which is open market purchases.

Which brings us to the bigger question of how long such overnight repos will satisfy the market, and how long before the next repo rate spike prompts the Fed to do the inevitable, and restart QE.

At least president Trump will be delighted.

* * *

Update 3: The chaos is just getting worse, and minutes after the Fed announced that it would cancel today's repo operation due to technical difficulties, it announced that it would hold a repo after all, with a closing time of 10:10am.



We now look forward to the results to see just how many counterparties were in desperate need of funding.

Which brings up an interest question: remember the discount window stigma? How many organizations will be willing to admit they were caught in a funding squeeze and needed repo access? We will find out in minutes.

* * *

Update 2: Total chaos - just 15 minutes after the Fed announced it would conduct the first repo in a decade to calm markets after overnight repo rates exploded, sending repo rates back to 0%, the Fed was forced to cancel the repo operation "due to technical difficulties." This is taking place just a week after the Fed inexplicably suffered similar technical difficulties during a recent POMO operation, which forced only the second ever POMO delay in history.



And while it is unclear if the NY Fed's infamous "interns" are now in charge of the Open Market Operations desk, and it is also unclear if the NY Fed's incompetent academic head, John Williams - who recently fired former PPT head Simon Potter - will be fired with cause, it is certainly unclear what will happen to the repo rate which tumbled on the repo news, and will now likely surge higher as it is unknown if and when the Fed will be able to do the repo operation, and more importantly, just what the technical difficulties were that led to this failure.

* * *

Update: Not long after we hinted that today's action in the US repo market is similar to what took place in 2013 China, when an explosion in funding rates nearly destroyed the local banking system before the PBOC intervened, the Fed has done just that, and as everyone - finally - began to realize this morning that something was very broken in the short-term liquidity markets, as overnight general collateral repo exploded to 10%...



... the New York Fed announced it will conduct its first overnight repo operation (for up to $75 billion) for the first time in a decade.

In accordance with the FOMC Directive issued July 31, 2019, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct an overnight repurchase agreement (repo) operation from 9:30 AM ET to 9:45 AM ET today, September 17, 2019, in order to help maintain the federal funds rate within the target range of 2 to 2-1/4 percent.

This repo operation will be conducted with Primary Dealers for up to an aggregate amount of $75 billion. Securities eligible as collateral in the repo include Treasury, agency debt, and agency mortgage-backed securities. Primary Dealers will be permitted to submit up to two propositions per security type. There will be a limit of $10 billion per proposition submitted in this operation. Propositions will be awarded based on their attractiveness relative to a benchmark rate for each collateral type, and are subject to a minimum bid rate of 2.10 percent.

This is precisely what we said last Friday would be the Fed's first line of defense, when we laid out what may happen after the dollar funding shortage arrives:

  1. repos, i.e. temporary ad hoc reserve adding open market operations,
  2. Treasury purchases, i.e. permanent open market operations, similar to outright UST QE only without a clear QE mandate (for now), and 
  3. standing repo facility (SRF), i.e. a new facility that could "automatically" add reserves to the banking system when GC or fed funds reaches a threshold above IOER.

We are now at 1. If and when repo rates continue to rise even with the Fed's repos in market, the Fed will have no choice but to launch either QE or start a standing repo facility.

For those who may have forgotten how repos work - which is to be expected in a world where all the excess funding was provided by QE - here is the explainer we provided last week:

1. Old school funding pressure lessons: repos & outrights

Pre-crisis the Fed relied on two types of open market operations to manage funding markets and their balance sheet: (1) temporary repo or reverse repo operations (2) outright UST purchases. Repo operations were used to "fine tune" the amount of reserves in the banking system to hit the fed funds target rate while outright UST purchases were used to offset currency in circulation growth. As a reminder, currency growth - of which we have seen a dramatic increase in recent years as the amount of $100 bills in circulation has soared - eats away at reserves in the banking system; this would pressure fed funds higher if the Fed did not growth their balance sheet to offset this (Exhibit 1).



  • Reserve adding operations: both repos and outright UST purchases have the same impact on the Fed's balance sheet: on the asset side they increase SOMA holdings and on the liability side they increase reserves (Table 1). The only difference is that repos are relatively short-lived and unwind on an overnight or short-term basis; outright Treasury purchases have a permanent impact on the Fed's balance sheet.
  • Reserve draining operations: pre-crisis the Fed only ever engaged in open market operations to drain reserves as a "fine tuning" fed funds management exercise. Prior to 2008 the Fed never engaged in any permanent open market operations to drain reserves (such as UST sales) since they only ever used this tool to offset currency growth.

Next, Cabana provides some historical perspective on each of the temporary repo and permanent UST purchase open market operations focuses on those operations that add reserves. As funding pressures begin to emerge and likely worsen in Q4, the BofA rates strategist expects the Fed to step in and use both sets of tools to contain these pressures and keep the fed funds in its target range.

Temporary repo operations

Temporary open market operations were a common practice prior to the crisis, when the Fed was in a scarce reserve regime. The New York Fed conducted frequent repo operations to fine tune the amount of reserves in the system and to ensure that the fed funds effective hit its target point. Below is a review of the mechanics of such repo operations as well as historical activity from 2000-2008. If the Fed conducts repo operations again to offset funding pressures, there will likely be parallels to their historical operations.

The mechanics

Temporary repo operations were executed in the tri-party market and were conducted only with primary dealers. Historically, repos were

  1. multiple price and fixed amount
  2. announced only at the outset of the open market operation
  3. executed across Treasury, agency debt, & agency MBS collateral types (Chart 1).

The Fed provides data on repo operations starting in July 2000. An increase in Fed repo operations corresponds to a similar increase in reserves, all else equal (Exhibit 1).



Historical repo operations

From mid-2000 to the end of 2008, the NY Fed conducted 5 UST repo operations on average each week. Overnight operations averaged around $5bn in size while term operations averaged around $4bn (Table 2). Fed repo operations were all fixed quantity and multiple price, which means that dealers were able to submit varying rates at which they would underwrite the repo operation. The Fed reports the high and low rate that dealers showed into the Fed: the range of rates averaged 13bps and was unsurprisingly wider for term rates. Operations were typically conducted between 8:30 and 10:00AM.



What to expect this time

If funding markets face stress in the next few months - which Bank of America expects will happen - the Fed could easily conduct repo operations to stem upward  pressure. Since the recession, the NY Fed has periodically conducted small repo operations in order to "test operational readiness." There have been 21 operations in total since 2012 - which is somewhat bizarre considering there are well over $1 trillion in reserves floating around the financial system -  and the last set of Fed test repo operations was conducted in May. In the past few years the repo tests have been very small (around $23mn in size for USTs), were multiple price, and were overnight or matured in 2-3 business days. The tests have also been across UST, agency debt, & agency MBS collateral. The tests indicate that the NY Fed is prepared to conduct such repo operations at any time and that this is a readily available solution for any sharp increase in funding markets.



*  *  *


Something critical is going on in overnight funding markets: ever since March 20, the Effective Fed Funds rate has been trading above the IOER. This is not supposed to happen, and it just got significantly worse.

As a reminder, ever since the financial crisis, in order to push the effective fed funds rate above zero at a time of trillions in excess reserves, the Fed was compelled to create a corridor system for the fed funds rate which was bound on the bottom and top by two specific rates controlled by the Federal Reserve: the "floor" for the corridor was the overnight reverse repurchase rate (ON-RRP) which usually coincides with the lower bound of the fed funds rate, while on top, the effective fed funds rate is bound by the rate the Fed pays on Excess Reserves (IOER), which served as the corridor "ceiling."

Or at least that's the theory. In practice, the effective FF tends to occasionally diverge from this corridor, and when it does, it prompts fears that the Fed is losing control over the most important instrument available to it: the price of money, which is set via the fed funds rate.

Ever since March 20, this fear is front and center because as shown in the chart below, starting on March 20, the effective Fed Funds rate rose above the IOER first by just 1 basis point. The Fed attempted to technically tamp this down.. and failed. But today the Effective Fed Funds Rate has exploded....



Smashing above the IOER...



Source: Bloomberg

As we noted earlier, no one is sure of what is driving this apparent liquidity shortage

  • elevated UST supply,

  • bloated dealer balance sheets and year-end regulatory constraints

  • a banking system near reserve scarcity,

  • investors selling bonds back to dealers, and

  • banks and money-market funds to make their quarterly tax payment.

The bottom line is simple - The Fed has lost control of its rate-control mechanism.

So what should the Fed do to regain control over interest rates?

According to Barclays to address the expected increase in fed funds volatility, the Fed, having ended the balance sheet runoff this summer instead of waiting until September, could create a standing repo facility - something which has been rumored for months - or conduct standard open market operations, injecting even more liquidity into the system.

But as we noted earlier, the problem for the Fed is that following today's massive move in repo higher, it now appears that the Fed is once again behind the curve, and this time the funding squeeze could have dire consequences for not only the economy but the market, as the broken repo plumbing means that despite $1.4 trillion in excess reserves, one or more banks are suddenly left without liquidity, which as we explained over a month ago in "Forget China, The Fed Has A Much Bigger Problem On Its Hands", the only alternative Powell may soon have is to restart QE.

Fun week so far:

  • Monday: biggest ever surge in oil

  • Tuesday: biggest ever surge in GC repo

But stocks are near record highs, because... The Fed.

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Liquidity Shortage Getting Worse: Fed's Repo Oversubscribed As Funding Demand Soars 50% Overnight

Profile picture for user Tyler Durden
Wed, 09/18/2019 - 08:45

20 minutes after today's repo operation began, it concluded and there was some bad news in it: as we feared, yesterday's take up of the Fed's repo operation which peaked at $53.2 billion has expanded substantially, and according to the Fed, today there was a whopping $80.05BN in bids submitted, an increase of $27 billion, or 50% more than yesterday.

It also meant that since the operation - which is capped at $75BN - was oversubscribed by over $5BN, that there were participants who did not get the last-minute liquidity they needed, and that the Fed will see demands to either expand the size of its operations, or implement a fixed operation and/or transition to permanent open market operations, i.e. QE



By comparison this is what yesterday's repo operation looked like:




What is immediately notable is that except for agency paper, there was a greater use of both Treasury ($40.9BN to $51.6BN) and Mortgage-backed ($11.7BN to $27.8BN) collateral. The only silver lining: the step out rate on agency paper dropped from 3.00% to 2.1% however with virtually nobody using that, it is a largely meaningless easing in terms.

Finally, the worst news is that immediately after the operation, overnight repo remained elevated, with Reuters reporting the rate was 2.25%-2.60% after the latest repo operation, confirming that the liquidity shortage continues with the high end of repo still far above fed funds.

* * *

Yesterday's Fed repo operation - the first direct liquidity injection in a decade - was an unmitigated disaster, with the NY Fed forced to cancel it in the middle due to "technical difficulties" which nobody still know what they were, only to resume it moments later. All we can say is that today the Fed better not **** this up again, especially with New York Fed President John Williams, senior vice president of market operations Lorie Logan and first vice president Michael Strine all expected to be in Washington for the Fed's two-day central bank meeting.

In any case, moments ago the NY Fed announced that, as expected, today's repo operation started at 8:14am as expected, with the repo rate trading quite elevated around 2.80% and the SOFR trading bizarrely above 5%

  • Overnight U.S. Funding Rate at 2.8%, Elevated for a Third Day

With such mindboggling volatility, SOFR will certainly make a "great" LIBOR replacement.



Check back here at 830am ET for the results; it will be interesting if the total uptake today is over yesterday's $53BN - that will suggest that the problem is getting worse, not better...

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Fed Funds Prints 2.30%, Breaching Target Range, As Libor Replacement Soars To "Remarkable" 5.25%

Profile picture for user Tyler Durden
Wed, 09/18/2019 - 09:17

If today's second consecutive repo was supposed to calm the stress in the secured lending market and ease the funding shortfall in the interbank market, it appears to have failed. Not only did O/N general collateral print at 2.25-2.60% after the repo operation, confirming that repo rates remain inexplicably elevated even though everyone who had funding needs supposedly met them thanks to the Fed, but in a more troubling development, the Effective Fed Funds rate printed at 2.30% at 9am this morning, breaching the Fed's target range of 2.00%-2.25% for the first time.



This also means that the EFF-IOER spread has now blown out to an unprecedented 20bps, yet another indication that the Fed has lost control of the rates corridor.




But in what may be the most concerning move, today's print for the Secured Overnight Financing Index (SOFR), which is widely expected to be Libor's replacement, exploded higher by 282bps to a record 5.25%.



Commenting on the blow out in the SOFR, Goldman had this to say on the "extremely volatile" price action in the key funding index:

The SOFR market saw extremely volatile price action over the course of the day.... Almost 20k in SERU9 blocks printed from 11:15am through the afternoon, pushing SERFFU9 from -10 to -21.5. Shortly after 4pm the market was given another jolt of adrenaline as news of a second Fed operation to be conducted tomorrow morning at 8:15am caused the spot-6mo curve to go bid into the close.

The problem here is that since SOFR is expected to replace LIBOR as the reference rate for several hundred trillions in fixed income securities, a spike such as this one would be perfectly sufficient to wreak havoc across market if indeed it had been the key reference rate.

Finally,courtesy of BMO's Jon Hill, here is some commentary on today's oversubscribed, and clearly insufficient, repo operation by the Fed:

Today's emergency repo operation was oversubscribed with $51.6 bn in Treasury and $22.8 bn in MBS collateral accepted. The weighted average in USTs was 2.215%, with a high rate of 2.36% and a low of 2.10%. This should help alleviate some stress in USD funding markets, and the fact that it's occurring earlier in the morning than Tuesday should help keep daily averages more subdued than yesterday - SOFR printed at a remarkable 5.25% (a stunning 282 bp spike) with fed funds still unknown but scheduled to be released at 9:00 AM ET and likely to print outside of the target range.

If Powell is successful at guiding the market toward assuming a mid-cycle adjustment, one specific repricing that will occur is in 2020 forwards, which are still factoring in one and a half 25 bp cuts next year as shown in the attached (admittedly, precision here is difficult due to the illiquidity of the Jan '21 contract). This contrasts with the FOMC's desire to execute a more modest drop in overnight rates and the price response here will be a focal point in determining how markets are responding to the impending Fed communication. If Powell is effective, look for that area of the curve to steepen sharply.

And so with funding generally locked down for the rest of the day, everyone will now turn attention to what Powell says and how he proposes to ease the funding panic at 2pm today when the FOMC cuts rates by 25bps.

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Stunning Consensus Emerges: Fed May Announce Launch Of QE In Just A Few Hours

Profile picture for user Tyler Durden
Wed, 09/18/2019 - 11:34

It was back on August 6, in an article titled "Forget China, The Fed Has A Much Bigger Problem On Its Hands", where we explained why in response to the coming dollar funding shortage and liquidity crunch (we warned about this month's repo crash over a month ago), we first said that Fed will likely resume QE as soon as the fourth quarter. Needless to say, with the Fed having only just cut rates for the first time in over a decade just a week earlier, others looked at us funny, even though just two days later we got the clearest sign yet that the Fed was indeed contemplating QE when we described a very odd email we received from a Fed researcher in "When You Get An Email Like This From The Fed, It May Be Time To Panic."

In any event, virtually no 'serious' Wall Street analyst predicted that QE would be on traders lips in the immediate future, and certainly nobody predicted the coming "dollar funding storm", which we warned readers about just last Friday.

Fast forward to today when one analyst after another is scrambling to "predict" that today, with its repo operations woefully inadequate to calm the storm that has gripped the funding markets and the dollar shortage, the Fed may go so far as to expend its balance sheet by announcing the launch of permanent open market operations, i.e., the monetization of bonds.

Just please don't call it QE.


Let's start with Nomura's rates analyst Lewis Alexander, who overnight - just like every other STIR strategist - comments on the record fireworks in the repo market and writes that after a period a relative stability from early May through mid-August, reserves in the banking system have been declining in recent weeks, something we said would happen as we entered the fourth quarter as the Treasury scrambled to rebuild its cash balance.



As Nomura further notes for those who missed our justification for the recent sharp drop in reserves, "with the asset side of the Fed’s balance sheet fixed, the recent declines in reserves have been driven by increases in the Fed’s non-reserve liabilities, primarily the Treasury General Account (TGA), currency outstanding and deposits held by foreign official institutions." Additionally, the Japanese bank estimates that yesterday the Trasury's cash balance at the Fed went up by $60-100bn, due to the regular pattern of corporate tax payments, and concludes what is by now apparent to everyone "the decline in reserves driven by these increases in the Fed’s other liabilities had an outsized impact on funding markets."

Why does this matter? Because it all comes as the Fed is determining how far they should let reserves fall, among other key things, such as how far should the Fed let rates drop.

Some more details: Reserves reached $2.8tn in late 2014 when the Fed stopped expanding its balance sheet and they were $2.2tn when, in late 2017, the Fed decided to begin to let its assets gradually run off. By June of this year, when the Fed decided to end runoff, reserves had fallen to $1.5tn. While the debt limit was binding this year – from March through early August – the TGA was trending lower, and this tended to offset the impact of growth of the Fed’s other liabilities on the level of reserves. However, when the debt limit was raised in early August it was clear - and we noted so at the time - that the Treasury was going to increase its cash holdings relatively quickly, and as we noted over a month ago, they were expected to reach $350bn by end-September which was going to put significant downward pressure on reserves.

Meanwhile, pressures that have emerged in funding markets in recent days, and the Fed’s decision to conduct a short-term repo transaction today, suggest that the Fed may be reassessing the level of reserves that is consistent with good control of the nexus of short-term interest rates.

With all that said, and given recent events, Nomura now expects Chair Powell and the FOMC to say something about their plans for the balance sheet at the conclusion of this week’s FOMC meeting, where the bank sees four options:

  1. The FOMC and/or Chair Powell could simply state that the FOMC will conduct short-term repo transactions as needed to maintain short-term interest rates within a range that is consistent with the target range for the funds rate. This could be part of the FOMC statement or it could be part of Powell’s opening remarks at the post-meeting press conference.
  2. The FOMC could say they they will start to expand the Fed’s balance sheet as soon as practicable, in line with the growth of the Fed’s non-reserve liabilities. If the FOMC makes this decision it is likely to be included in the FOMC statement.
  3. The FOMC may again lower IOR relative to the top of the federal funds target range, in an effort to keep the fed funds rate well within the FOMC’s target range.
  4. The FOMC could announce they they are launching a new standing repo facility.

While Nomura generally rules out option four and sees option 1 as most likely, it is the bank's discussion of option two that is most relevant. This is what Alexander said on the topic:

The second option – announcing that they will start to expand the balance sheet in coming weeks – also seems likely. Operationally it would not be hard to implement. The New York Fed is already purchasing assets to offset the runoff of its existing Treasury and MBS securities. It would be relatively simple to expand the size of those purchases to take account of increases in other liabilities. The Treasury’s plans for their cash balance will likely continue to put downward pressure on reserves in coming weeks and we expect the level of reserves to reach $1.3tn by the end-September, or sooner. Moreover, the pressures that affected funding markets in the last few days may be an indication that reserves have fallen “enough.”

And so, at least one bank thinks it is "likely" the Fed may announce permanent open market operations, i.e., regularly scheduled bond purchases to inject market liquidity. Nomura is not the only one.

In his latest installment analyzing the impact of tumbling reserves, BofA's Mark Cabana, who was probably the most ahead of the Wall Street curve on this topic, also presents his personal views as to what caused the recent spike in repo, which he attributes to a substantial decline in reserves, and which serves to confirm that the amount of cash in the baking system is too limited, concluding that "the limited amount of reserves is the key driver of the funding pressures."

Cabana also points out that whereas before the crisis zero excess reserves were perfectly sufficient in a world where banks regularly used the Fed's discount window, that is no longer the state of play, largely due to regulatory and liquidity requirements, and as a result with funding pressures rising as reserves have declined to ~$1.35tn suggests that the market is on the upward sloping part of the reserve demand curve, below the minimum amount of reserves needed for an "abundant reserve regime."

The repo operations in the past two days - the first in a decade - bring us closer to the flat portion of the reserve demand curve, buy it is temporary: as shown in the chart below, there is a roughly $400BN reserve shortage to normalize the FF-IOER spread. 



With repo rates still high, it is also clear that the repo operation has not quelled repo pressures and the Fed will need to keep providing cash to the market to maintain an abundant quantity of reserves in the system.

Which brings us to Cabana's punchline: "Fed may announce outright purchases Wednesday."

Echoing Nomura, the BofA strategist predicts that at today's FOMC meeting, "we see risks the Fed indicates they intend to stabilize the level of reserves in the system. This is not our base case for now but we see substantial risks of such an action. Such a statement would imply that permanent balance sheet growth and outright purchases are necessary." Cabana believes that such a communication would likely be included in the Fed's "implementation note" and also likely be discussed by Chair Powell in his press conference.

How much "bond purchases" would the Fed announces? The answer is not far off the $400BN we extrapolated based on the chart above:

"The Fed will likely need to purchase $250bn in assets in the secondary market to return to an "abundant" reserve level plus a buffer, and will need to continue outright purchases of ~$150bn/yr to maintain this reserve level. Reserves declined ~$100bn at the start of the week and the banking system appears to have reached the upward sloping part of the demand curve with this drain.

There's more, literally.

As Cabana then adds, the Fed will also likely want to maintain a buffer above this "abundant" level. here, using variations in Fed liabilities since the start of 2019, BofA estimate this buffer to be around $150bn based on prior NY Fed analysis; in other words, "to offset Monday's reserve drain and add a buffer, the Fed's balance sheet needs to grow $250 bn."

Then, to maintain reserves at "abundant" levels, the Fed will need to continue outright purchases to meet growth in demand for their liabilities. This demand comes from:

  • Currency in circulation - which grows with GDP. Fed surveys show the median growth expectation at 4.9% per year.
  • Bank HQLA - reserves fulfill HQLA needs of banks and should growth with bank balance sheets.
  • Treasury cash balance - which is based on expected five day outflows and should grow with the deficit.
  • To meet this demand for their liabilities, we estimate the Fed will need to purchase ~$150bn in USTs per year.

In sum, and confirming what we said above, the Fed's purchases could be $400bn in the next year, according to BofA, which would be front-loaded with a $250bn purchase now, and annual run-rate of $150bn.

Oh, and for those wondering what the Fed will purchase, here is the answer:

We expect purchases will occur across the curve, to reflect the distribution of USTs outstanding (which is how they currently purchase) and most likely only in USTs. The Fed could front-load these purchases at the front end of the curve to exert a larger impact on repo, but may not want to deliberately steepen the curve and tighten financial conditions while lowering interest rates. Purchasing across the curve would also be consistent with how the Fed offset currency growth via "coupon passes" prior to the crisis. We acknowledge there is lots of uncertainty on this question.

Needless the say the market reaction would be instant, with "richening of yields across the curve, especially in the long end" if the Fed announces outright UST purchases as now appears to be consensus.

Finally, completing the trifecta of strategists expecting the Fed to launch QE open market purchases, is Morgan Stanley strategist Matt Hornbach, who said that "the Federal Reserve is likely to announce permanent open market operations in its communications Wednesday. "

Speaking in an interview on Bloomberg TV, the rates strategist said that this step would allow the Fed to address the funding market’s strains without stoking fears of a systemic problem or fueling talk of a recession. Echoing what Cabana said above, Hornbach agrees that "the buffer of reserves that the Fed was hoping to have in the system clearly isn’t there any more."

Ok... but won't a restart of QE trigger PTSD flashbacks to 2009 and the financial crisis, and telegraph to the world that the US is in a recession? Well, this is where semantic comes into play, because when is QE not QE? Or when is debt monetization not debt monetization? Or when is state financing not state financing? When it is something else. And here is where the magic of narratives come in.

As Hornbach writes, "POMOs will help the Fed avoid the implication that it’s restarting QE, which could raise suspicions of a bigger economic threat."

Wait, wait, wait... Isn't POMO, i.e. permanent open market operations precisely the way one implements QE? After all, even Cabana above admits the Fed will need to expand its balance sheet by up to $400BN in the very short term to normalize financial conditions? Apparently, to Morgan Stanley, the answer is no.

"When you start losing control of the target rate, you need to increase reserves in the system, but that’s not necessarily QE as we know it in a traditional sense. They’re going to do this via permanent open market operations."

Oh, so it's not QE... it's just what the central bank does when it implements QE. Thanks, Matt, I think we got it.

Watch his entire interview, and much more below.


Besides the staggering implications for capital markets from a return to QE, what all of the above means is that Wall Street now expects the Fed to not only cut rates, but to launch QE... pardon, start permanent open market operations (also known as QE). This also means that the bar is suddenly much lower for the Fed to disappoint consensus Wall Street, and trader, expectations because if Powell merely commits to a 25bps cut with no follow through, and says nothing about a standing repo facility and/or POMOs, the market will be extremely displeased, and the result will be not only a violent drop in risk assets, but a blow out in funding levels to new all time highs.

The combination of those two taking place at the same time could just be the catalyst that culminates in the next market crash, unless of course the Fed yields to Wall Street demands for even more liquidity, and stocks soar to new record highs on the back of rate cuts and QE at a time when the US economy is firing on all cylinders.

One final fringe benefit: president Trump will be very happy and Powell will keep his job for at least a few more months.

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Russia’s Largest Oil Company Ditches Dollar in New Oil Deals

Global Research, October 04, 2019 3 October 2019



Russia’s largest oil company Rosneft has set the euro as the default currency for all new exports of crude oil and refined products, as the state-controlled giant looks to switch as many sales as possible from U.S. dollars to euros in order to avoid further U.S. sanctions against it.

As of September, Rosneft is seeking euros as the default option of payment for its crude oil and products, Reuters reported on Thursday, quoting tender documents the Russian firm has published.

“Rosneft has recently adjusted all the new contracts for export supplies to euros,” a trader at a company that regularly procures oil from Rosneft told Reuters, adding that buyers have already been notified of the change.

Rosneft is the biggest oil exporter from Russia, selling around 2.4 million barrels per day (bpd) of oil, according to Reuters estimates.

In the latest tender for a spot sale of 100,000 tons of Urals blend loading from the port of Primorsk at the end of October, Rosneft specifies that the default currency in the payment should be in euros, according to the tender document cited by Reuters.

The United States has not ruled out imposing sanctions on Rosneft over its involvement in trading oil from Venezuela. Rosneft has been reselling the oil from the Latin American country to buyers in China and India and thus helping buyers hesitant to approach Venezuela and its state oil firm PDVSA because of the U.S. sanctions on Caracas, and, at the same time, helping Venezuela to continue selling its oil despite stricter U.S. sanctions.

In August, Rosneft told customers that oil product sales in tender contracts will be priced in euros instead of U.S. dollars, trading sources told Reuters back then.

Rosneft’s move was seen by traders and analysts as a future hedge against potential new U.S. sanctions on Russia and/or its oil industry.


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