[yasp]

How can reserves be too low when there are $1.4 T in excess reserves? How can repo rates spike to nearly 10% when the interest earned on those $1.4 T reserves only yields 1.80%?

edit: more questions. As I understand it, the "repo market" is broader than only banks. Why is it that the Fed performing repo operations will alleviate the liquidity issue in the repo market, unless it is some such bank borrowing in the repo market that is the cause of the problem? And given the point about the size of excess reserves, and the low yield they earn, is there any way for the repo rate to have spiked unless there were some bank that weren't able to muster adequate collateral?

[elSidCampeador]

I'd recommend for you to listen to the Bloomberg Odd Lots podcast from 15 April 2019 - it had Zoltan Poszar from Credit Suisse on to talk about the general trend in the money markets (and he was worried about something like this happening back then too), and quite a few of your questions should be answered by the time you're done.

Here's the link (it's also available on Apple Podcasts)- https://www.bloomberg.com/news/audio/2019-04-12/why-foreign-...

edit: It's a little heavy on content, so if you don't know much about the money market (like me when I first listened to it), I'd recommend having a pen and paper on hand to take notes.

[whatok]

Anything Zoltan on money markets is highly recommended. I think Bloomberg had him live at some event last night that was recorded.

[elSidCampeador]

Please share the link if you have it!

[whatok]

It was this: https://go.bloomberg.com/attend/invite/bloomberg-odd-lots-va...

I'm not sure if it was actually recorded or not.

[o-__-o]

And spend the 30 seconds at least telling us what some event is in case others are possibly interested like OP suggests

[thedudeabides5]

These are good questions and not sure I’ve seen good answers out there yet

The rate spiking is indeed reflective of someone needing collateral quickly and being willing to pay up for it.

Now the fact that it spiked doesn’t mean Armageddon, just check out Chinese interbank stats to get a sense of how much they can move.

That being said looks like a narrative has formed that it must mean reserves are “too low” and so, I guess we should print more.

Another perspective is we had a decent amount of monetary tightening, and tightening are designed to reduce liquidity, especially on the front end.

This is a sign that, that tightening, combined with regulatory pressure on banks to get out of this market, have indeed reduced liquidity.

Now, no one really wants to make levered entities go under because randomly repo liqidity dries up, so the answer is clearly to just print more money.

What’s being missed though is that this illiquidity is not a bug, it’s a lagged feature of monetary policy decisions from 2014-2018.

[elSidCampeador]

Obligatory - "That's just, like, your opinion, man"

But yep! I agree with you 100% on this being a result of all the monetary policy decisions taken over the last 4 years.

[pishpash]

Someone needing liquidity? Yeah, the Treasury needs its debt funded, all the VC's need their IPO's bought, there is just a lot of supply right now. That they converged in the overnight market on one particular day might be a coincidence, but the structural issue is the very large funding needs in the economy at a time when foreign buyers are turned away due to protectionism.

[pishpash]

$1T of that is locked up in effectively mandatory reserves on account of regulations.

https://www.stlouisfed.org/on-the-economy/2019/march/banks-d...

[simonh]

Quite, these are not 'excess' reserves, they are just reserves.

[yasp]

So the implication is that banks are hoarding excess reserves because they expect required reserves to be increased substantially in the future?

Regarding high quality liquid assets, wouldn't the collateral one would receive in a typical repo transaction qualify as such?

[whatok]

Because those reserves are locked up for regulatory reasons and they're also not evenly distributed.