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Matt Levine's explanation of what happened is considerably less sensationalized. Take a look at the second item of his column today [0]. It's too long to quote

Matt Levine's explanation of what happened is considerably less sensationalized. Take a look at the second item of his column today [0]. It's too long to quote and doesn't lend itself to an easy excerpt, but here are the facts that he quotes, from Bloomberg [1]: > A sudden surge in the overnight rate on Treasury repurchase agreements that began on Monday continued Tuesday -- with the rate opening at 7%, according to ICAP. … > What happened was an unfortunate coincidence -- just as companies were withdrawing cash from money markets to pay corporate tax, a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. > With just $24 billion of bonds maturing in the period, this became one of three occasions this year when the imbalance between debt redemption and cash needed to buy new Treasuries exceeded $50 billion. Again, if those paragraphs don't obviously relate to the overnight lending market, read his column for context. [0]: https://www.bloomberg.com/opinion/articles/2019-09-17/wework-s-ipo-doesn-t-work-yet https://www.bloomberg.com/opinion/articles/2019-09-17/wework... [1]: https://www.bloomberg.com/news/articles/2019-09-17/it-starts-as-a-repo-squeeze-before-spilling-into-funding-markets https://www.bloomberg.com/news/articles/2019-09-17/it-starts...

nickles 7y ago
> considerably less sensationalized To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ripple throughout the financial system.
- whatok 7y ago
  Agreed. This happened under a relatively calm market. People get closed out and this gets way worse when markets are more volatile.
- SilasX 7y ago
  Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% [1]. Why do banks need special assistance in that situation? If you depend on your input prices not going up by that much for a short period, you're hosed anyway... [1] 1.09^(1/365) - 1 vs 1.01^(1/365) - 1
  - whatok 7y ago
    No one is saying that paying more for a short period of time is going to destroy the financial system. However, if this does continue for a longer period of time, many cannot afford to finance at these rates and it also shows that the Fed has lost control of things.
  - teej 7y ago
    Very few things can survive a 10x increase in costs.
  - JackFr 7y ago
    They're financing on the order of a trillion dollars. It makes a difference.
  - ivalm 7y ago
    because with ~1e12 in financing this ends up being a cool $209.7M.
    - SilasX 7y ago
      Distributed over numerous billion-dollar businesses will annual profits in billions.
  - nickles 7y ago
    > Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% As a rates trader, your positions are denominated in the millions of dollars. Some back of the envelope math: 1mm of 10y treasuries (repo'd at EOD) is roughly $1k of risk (dv01 -- if rates move by 1bp, your pnl fluctuates by $1k). To finance that position, you're paying $236 at 9% vs $27 at 1%. Now say you've got 1mm of 2y treasuries. That's roughly $0.2k dv01. Unless 2y rates move 1.25bp overnight, you're losing money just financing the position. In short, there's a massive difference between paying 2.3bps and paying 0.27bps.
    - SilasX 7y ago
mywittyname 7y ago
It does suggest that the Fed's goal of lowering rates may introduce some unintended consequences.
- zenmaster10665 7y ago
  How so? This is the result of a glut in treasuries and a lack of dollars in money market funds.
throwaway5752 7y ago
I don't know, maybe it's undersensationalized. World doesn't want to finance US deficits any more. The combination of nationalistic policies, aggressive and unilateral cancellation of treaties, grossly antagonizing one of our largest debt buyers, and removing any pretense of lowering the structural deficit - those are a pretty bad combination of behaviors to exhibit. If I were the world, I wouldn't want to finance the US's budget any more, either. edit: downvotes, please explain: "The rate spike may also be a symptom of the sharp increase in Treasury bonds being issued to fund the federal government. The federal deficit has spiked to $1 trillion this fiscal year because of the tax cuts and surge in government spending. Banks typically buy Treasuries by borrowing in the overnight market. The jump in Treasury issuance caused a large increase in demand for short-term financing." this is via the overnight market, but that is part of the aggregate treasuries demand. Further, changes in the mix of top treasury purchases is well documented. You will note, "No one knows why this is happening," Jim Bianco CEO of Bianco Research, said on Twitter. "If it persists more than another day or two, it will be a problem." in the article. There has been much speculation if any large treasury holder were to selectively start selling. One can speculate how evidence of that would emerge in the markets.
- lkrubner 7y ago
  The Fed can always buy the debt, unless it wanted to raise interest rates, which it doesn't.
  - throwaway5752 7y ago
    Seems like a pretty bad idea in an ostensibly good economy. QE was considered dangerous and hypothetical until 10 years ago and that was an actual crisis. Do you see some danger in normalizing QE (even in more niche markets like overnight)?
    - dv_dt 7y ago
      I don't know if its a good idea to continue either, but Japan has been actively doing something similar for a while now. It hasn't caused catastrophe, but it hasn't pulled them into high growth either - but it could be argued that there are other factors affecting the overall economy there (the graying and shrinking of their population for one).
bsanr2 7y ago
I just think it's funny that rich people can get billions of dollars to stay solvent in a sudden crisis, and I can't get a dime when I can't pay for lunch. Am I reading this wrong? Is this a bad analogy? Is it not exemplary of how creditworthiness seems to rise at a higher rate than the means used to justify that creditworthiness? I'm a layman, but I'd like to know more.
- anoncareer0212 7y ago
  Bad analogy - the banking system doesn't fall apart if you miss lunch
  - pjmorris 7y ago
    Actually, that's exactly how banking systems fall apart, if you push it too far.
    - anoncareer0212 7y ago
      Actually, that takes such a broad view of the analogy that it has no semblance to the analogy, only the idea of completely ceasing all spending
  - excitom 7y ago
    You basically proved his point. The analogy is correct but no one cares if a little guy can't buy lunch. Same problem, different scale.
    - anoncareer0212 7y ago
      HN comments tend to have more charity than other places online – it's unlikely I "proved his point" by answering his query regarding if it's a bad analogy :) Its not that "no one cares" about "a little guy", it's that even though I didn't eat lunch today, my colleagues did. If me skipping lunch meant my colleagues didn't have any food, someone would step in to avoid my colleagues dying
- deleted 7y ago
PKop 7y ago
>a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. But this isn't slowing down any time soon, so the problem will keep recurring. Deficit's are rising, and foreign purchases of treasury debt has plateaued the past few years. This, some say, is the real problem: banks are forced to purchase this debt and so the funding needs of the US government are crowding out domestic banking sector. If continues, this means the Fed will effectively be monetizing US deficits. Luke Gromen has covered this in various podcast interviews[0] and on twitter: @LukeGromen. [0] https://www.macrovoices.com/podcasts-collection/macrovoices-all-stars-podcasts/673-all-stars-51-luke-gromen-usd-faces-day-of-reckoning-when-it-becomes-clear-fed-will-have-to-monetize-gov-t-deficits https://www.macrovoices.com/podcasts-collection/macrovoices-...
- BurningFrog 7y ago
  > If continues, this means the Fed will effectively be monetizing US deficits. You seem informed, and I want to be upset by this, but... What does "monetizing US deficits" mean here?
  - colechristensen 7y ago
    That the US deficit is not going to be paid for by selling debt to people around the world, it is going to be paid for by the federal reserve creating money and giving it to the treasury.
    - ilaksh 7y ago
      Why would the global community tolerate this, especially when the United States consumes much more than most countries? Seems like a recipe for WWIII.
      - Mountain_Skies 7y ago
        Incrementalism. As long as the U.S. does it on a relatively small scale (emphasis on relatively), no one will want to pay the costs involved in fighting against it, even if over longer periods of time it adds up.
1980phipsi 7y ago
Matt Levine is also a lawyer by training...
blazespin 7y ago
Given that these sorts of things can shock the economy, we usually have significant more wiggle room at all times to deal with coincidences like this. The fact that we're running out of wiggle room is the sensational problem. It's not like these coincidences haven't been happening since 2008..

nickles 7y ago

> considerably less sensationalized To be clear, a GC repo at 7% to 9% is outrageously high. Lack of short term financing can have severe repercussions that ripple throughout the financial system.

whatok 7y ago
Agreed. This happened under a relatively calm market. People get closed out and this gets way worse when markets are more volatile.
SilasX 7y ago
Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% [1]. Why do banks need special assistance in that situation? If you depend on your input prices not going up by that much for a short period, you're hosed anyway... [1] 1.09^(1/365) - 1 vs 1.01^(1/365) - 1
- whatok 7y ago
  No one is saying that paying more for a short period of time is going to destroy the financial system. However, if this does continue for a longer period of time, many cannot afford to finance at these rates and it also shows that the Fed has lost control of things.
- teej 7y ago
  Very few things can survive a 10x increase in costs.
- JackFr 7y ago
  They're financing on the order of a trillion dollars. It makes a difference.
- ivalm 7y ago
  because with ~1e12 in financing this ends up being a cool $209.7M.
  - SilasX 7y ago
    Distributed over numerous billion-dollar businesses will annual profits in billions.
- nickles 7y ago
  > Well, I guess it would be high on a typical loan. On an overnight loan, the difference between 9% APR and 1% APR is the difference between paying 0.0236% in interest for the loan and paying and 0.00273% As a rates trader, your positions are denominated in the millions of dollars. Some back of the envelope math: 1mm of 10y treasuries (repo'd at EOD) is roughly $1k of risk (dv01 -- if rates move by 1bp, your pnl fluctuates by $1k). To finance that position, you're paying $236 at 9% vs $27 at 1%. Now say you've got 1mm of 2y treasuries. That's roughly $0.2k dv01. Unless 2y rates move 1.25bp overnight, you're losing money just financing the position. In short, there's a massive difference between paying 2.3bps and paying 0.27bps.
  - SilasX 7y ago

mywittyname 7y ago

It does suggest that the Fed's goal of lowering rates may introduce some unintended consequences.

zenmaster10665 7y ago
How so? This is the result of a glut in treasuries and a lack of dollars in money market funds.

throwaway5752 7y ago

I don't know, maybe it's undersensationalized. World doesn't want to finance US deficits any more. The combination of nationalistic policies, aggressive and unilateral cancellation of treaties, grossly antagonizing one of our largest debt buyers, and removing any pretense of lowering the structural deficit - those are a pretty bad combination of behaviors to exhibit. If I were the world, I wouldn't want to finance the US's budget any more, either. edit: downvotes, please explain: "The rate spike may also be a symptom of the sharp increase in Treasury bonds being issued to fund the federal government. The federal deficit has spiked to $1 trillion this fiscal year because of the tax cuts and surge in government spending. Banks typically buy Treasuries by borrowing in the overnight market. The jump in Treasury issuance caused a large increase in demand for short-term financing." this is via the overnight market, but that is part of the aggregate treasuries demand. Further, changes in the mix of top treasury purchases is well documented. You will note, "No one knows why this is happening," Jim Bianco CEO of Bianco Research, said on Twitter. "If it persists more than another day or two, it will be a problem." in the article. There has been much speculation if any large treasury holder were to selectively start selling. One can speculate how evidence of that would emerge in the markets.

lkrubner 7y ago
The Fed can always buy the debt, unless it wanted to raise interest rates, which it doesn't.
- throwaway5752 7y ago
  Seems like a pretty bad idea in an ostensibly good economy. QE was considered dangerous and hypothetical until 10 years ago and that was an actual crisis. Do you see some danger in normalizing QE (even in more niche markets like overnight)?
  - dv_dt 7y ago
    I don't know if its a good idea to continue either, but Japan has been actively doing something similar for a while now. It hasn't caused catastrophe, but it hasn't pulled them into high growth either - but it could be argued that there are other factors affecting the overall economy there (the graying and shrinking of their population for one).

bsanr2 7y ago

I just think it's funny that rich people can get billions of dollars to stay solvent in a sudden crisis, and I can't get a dime when I can't pay for lunch. Am I reading this wrong? Is this a bad analogy? Is it not exemplary of how creditworthiness seems to rise at a higher rate than the means used to justify that creditworthiness? I'm a layman, but I'd like to know more.

anoncareer0212 7y ago
Bad analogy - the banking system doesn't fall apart if you miss lunch
- pjmorris 7y ago
  Actually, that's exactly how banking systems fall apart, if you push it too far.
  - anoncareer0212 7y ago
    Actually, that takes such a broad view of the analogy that it has no semblance to the analogy, only the idea of completely ceasing all spending
- excitom 7y ago
  You basically proved his point. The analogy is correct but no one cares if a little guy can't buy lunch. Same problem, different scale.
  - anoncareer0212 7y ago
    HN comments tend to have more charity than other places online – it's unlikely I "proved his point" by answering his query regarding if it's a bad analogy :) Its not that "no one cares" about "a little guy", it's that even though I didn't eat lunch today, my colleagues did. If me skipping lunch meant my colleagues didn't have any food, someone would step in to avoid my colleagues dying
deleted 7y ago

PKop 7y ago

>a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. But this isn't slowing down any time soon, so the problem will keep recurring. Deficit's are rising, and foreign purchases of treasury debt has plateaued the past few years. This, some say, is the real problem: banks are forced to purchase this debt and so the funding needs of the US government are crowding out domestic banking sector. If continues, this means the Fed will effectively be monetizing US deficits. Luke Gromen has covered this in various podcast interviews[0] and on twitter: @LukeGromen. [0] https://www.macrovoices.com/podcasts-collection/macrovoices-all-stars-podcasts/673-all-stars-51-luke-gromen-usd-faces-day-of-reckoning-when-it-becomes-clear-fed-will-have-to-monetize-gov-t-deficits https://www.macrovoices.com/podcasts-collection/macrovoices-...

BurningFrog 7y ago
> If continues, this means the Fed will effectively be monetizing US deficits. You seem informed, and I want to be upset by this, but... What does "monetizing US deficits" mean here?
- colechristensen 7y ago
  That the US deficit is not going to be paid for by selling debt to people around the world, it is going to be paid for by the federal reserve creating money and giving it to the treasury.
  - ilaksh 7y ago
    Why would the global community tolerate this, especially when the United States consumes much more than most countries? Seems like a recipe for WWIII.
    - Mountain_Skies 7y ago
      Incrementalism. As long as the U.S. does it on a relatively small scale (emphasis on relatively), no one will want to pay the costs involved in fighting against it, even if over longer periods of time it adds up.

1980phipsi 7y ago

Matt Levine is also a lawyer by training...

blazespin 7y ago

Given that these sorts of things can shock the economy, we usually have significant more wiggle room at all times to deal with coincidences like this. The fact that we're running out of wiggle room is the sensational problem. It's not like these coincidences haven't been happening since 2008..