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From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary deale
by yasp 7y ago
From what I've been able to gather, there has been a decrease in demand for US Treasurys from certain segments of the market. This has resulted in primary dealers having to purchase the difference. They don't purchase USTs from cash on hand. Instead, they use the repo market to fund the purchase. However, the supply of repo market funds is relatively inelastic. Thus, you have a big spike in repo demand with a relatively fixed supply. This was causing the rate spikes we saw. Thus the Fed stepping in as lender of the last resort.
- not2b 7y agoIt seems to me that the issue is that there has been an increase in supply, because of the massive deficit. This means that there are more US Treasuries for sale than there are buyers. They could sell more by letting the interest rate rise, but that would have major negative effects if a large increase is required.
- yasp 7y agoThe increased supply of UST is another contributing factor, yes. Important point AFAICT is the supply inelasticity of repo funds.
- AnimalMuppet 7y agoSo: Not enough demand for Treasuries, dealers have to purchase the difference, dealers running out of money to keep doing that, the Fed supplying the money for repo. I can buy all that, and it makes me nervous. How close are we to a failed auction where the dealers won't or can't purchase the difference? How close are we to the Fed having to buy them directly?