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Anyone following the Repo market roller coaster


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I don't see a current events forum so I will put this here. It does have a lot to do with liquidity risk.

A month or so ago the repo rates spiked to 10%, so the Fed stepped in with liquidity support. With what they have now pledged to add in December it will be about $500 billion in reserves added to the system. It's QE4, but they deny it is QE4 so people are calling it "Not QE4."

This gentleman, Zoltan Pozsar, is considered the Repo guru. He used to work for the Fed, now he writes analysis reports for Credit Suisse. He thinks things are going to get worse before the end of the year. They are calling it Repocolypse 2.0.


Yesterday the Fed countered and announced a lot of liquidity to counteract the year end cash crunch. But Pozsar says it won't be enough.


Now all of this stuff is pretty deep but I do enjoy reading about it. This article talks about a part of the Repo market called the "Turn" which I am still trying to educate myself about.


What is driving all of this? A few things.

1. Companies need cash to pay taxes at the end of the year.
2. Large banks, especially JP Morgan, have rolled more into Treasuries instead of putting up their cash in the Repo market. Why? Because of regulations. They would face higher capital charges by being in the Repo market instead of Treasuries. Some people think JP Morgan is purposely squeezing the Repo market to force the regulators to ease the Capital regulations.
3. Something else I have read, the repo demand is largely driven by hedge funds borrowing in the repo market, buying treasuries, and synthetically shorting treasuries with derivatives to lock in an interest rate arb.

So, way above my pay grade, but this is all real world stuff that is very related to the FRM syllabus, the repo market and capital charges.


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The comments are interesting on the ZeroHedge articles. I suppose I am fatigued from the incessant doomsday reports, so it would take some extraordinary evidence to convince me. It does seem interesting though.