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> $3.6 million per 1 billion How many of those billions are being borrowed? The Fed is putting up $165 billion to help the market. So we can assume the market

> $3.6 million per 1 billion How many of those billions are being borrowed? The Fed is putting up $165 billion to help the market. So we can assume the market is at least that large. If we use your 3.6 million per billion figure, that's $600 million. Of course, the fed isn't the entire market, so we're probably talking a rescue worth several billion dollars. Hardly a rounding error.

SilasX 7y ago
The relevant figure to look at is borrowing costs per dollar borrowed against typical return on capital. 0.36% shouldn't make a big difference there.
- whatok 7y ago
  Your last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets. There is a lot of leverage in repo financed trades and 36bps absolutely does make a difference.
  - SilasX 7y ago
    Then maybe you could use your superior understanding to convey the relevant insights, rather than just assert that they exist.
    - whatok 7y ago
      There's no need to get sarcastic about things. If I said at work what you posted about 36bps not mattering I would get fired on the spot. It shows a fundamental lack of understanding of the topic but for whatever reason you are asserting very strong opinions on the topic. ON repo usage outside of FICC [1] members is quite often used to finance leveraged low margin transactions. Given information provided so far and what has been observed in the markets, one of the common theories of what caused ON to spike is Treasury basis [2] trades. Given the magnitude and speed of the ON spike and current positioning [3], this theory makes a lot of sense. If this is one of the causes, a spike in ON absolutely matters and isn't just a rounding error. [1] https://www.investopedia.com/terms/f/ficc.asp https://www.investopedia.com/terms/f/ficc.asp [2] https://www.cmegroup.com/education/courses/introduction-to-treasuries/the-basics-of-treasuries-basis.html https://www.cmegroup.com/education/courses/introduction-to-t... [3] https://www.cftc.gov/dea/futures/financial_lf.htm https://www.cftc.gov/dea/futures/financial_lf.htm
      - SilasX 7y ago
        I explained the basis for my reasoning about the upper bound, on banks, of the impact of the higher effective federal funds rate. I concluded that the size of the impact "shouldn't matter." I don't see how that translates to "very strong opinions" on the topic. Instead, it's an invitation for others to directly address and correct the error in logic. You, for your part, are conveying very strong opinions on the topic and asserting that you understand it well. But, the first time around, you made a cryptic reply that focused more on calling me ignorant [1] than on pinpointing the error in my model. When I referred to your superior understanding, that was not sarcasm; that was taking your assertion at face value. I recognize that others may know more about this. One implication of having superior understanding is the ability to make better contributions contributions to the discussion than calling someone ignorant [1] and asserting that a small RoR matters because leverage. But rather than address the specific error your believe exists, you made an orthogonal claim, obscured with jargon you didn't define (like "ON"). To clarify, my original assertion was that, even if banks had to absorb the entire extra cost of the higher interest rates, that would still be small compared to their return to capital. Do you disagree with that? Is there another mechanism by which the higher borrowing costs translate into higher costs throughout the economy? If so, what is that mechanism? If you have the superior understanding you claim to, then answering those questions is how you can refute the model I presented, and it should be easy with such an understanding. But telling me that your work buddies think I'm stupid -- that does not add to the discussion. [1] "Your last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets." Later, you said, "If I said at work what you posted about 36bps not mattering I would get fired on the spot. "
        whatok 7y ago
        Note how I only focused on your assertion that 36bps "does not make a big difference". That is a strong opinion that is not based on market reality and also has several incorrect assumptions baked into it. Based on continued references to "banks eating the cost", you seem to think that banks are the only ones involved in these transactions. They aren't and not understanding that means that it's very hard to understand the life of a repo transaction. The simple mechanics of a repo transaction are easy to explain but there are a lot of individual parts underlying each transaction. The individual parts sum up to a pretty complex beast that is hard to understand. Reducing this to "can't banks just eat the costs?" is borderline misinformation which does no one any good. I previously gave a trade example that is a likely cause (or something similar) of the market events that transpired this week. It's a good example of how 36bps matters (my original point of contention). The NY Fed has a very good guide to the repo markets [1]. Hope these help. [1] https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf https://www.newyorkfed.org/medialibrary/media/research/staff...
- deleted 7y ago
  [deleted]

SilasX 7y ago

The relevant figure to look at is borrowing costs per dollar borrowed against typical return on capital. 0.36% shouldn't make a big difference there.

whatok 7y ago
Your last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets. There is a lot of leverage in repo financed trades and 36bps absolutely does make a difference.
- SilasX 7y ago
  Then maybe you could use your superior understanding to convey the relevant insights, rather than just assert that they exist.
  - whatok 7y ago
    There's no need to get sarcastic about things. If I said at work what you posted about 36bps not mattering I would get fired on the spot. It shows a fundamental lack of understanding of the topic but for whatever reason you are asserting very strong opinions on the topic. ON repo usage outside of FICC [1] members is quite often used to finance leveraged low margin transactions. Given information provided so far and what has been observed in the markets, one of the common theories of what caused ON to spike is Treasury basis [2] trades. Given the magnitude and speed of the ON spike and current positioning [3], this theory makes a lot of sense. If this is one of the causes, a spike in ON absolutely matters and isn't just a rounding error. [1] https://www.investopedia.com/terms/f/ficc.asp https://www.investopedia.com/terms/f/ficc.asp [2] https://www.cmegroup.com/education/courses/introduction-to-treasuries/the-basics-of-treasuries-basis.html https://www.cmegroup.com/education/courses/introduction-to-t... [3] https://www.cftc.gov/dea/futures/financial_lf.htm https://www.cftc.gov/dea/futures/financial_lf.htm
    - SilasX 7y ago
      I explained the basis for my reasoning about the upper bound, on banks, of the impact of the higher effective federal funds rate. I concluded that the size of the impact "shouldn't matter." I don't see how that translates to "very strong opinions" on the topic. Instead, it's an invitation for others to directly address and correct the error in logic. You, for your part, are conveying very strong opinions on the topic and asserting that you understand it well. But, the first time around, you made a cryptic reply that focused more on calling me ignorant [1] than on pinpointing the error in my model. When I referred to your superior understanding, that was not sarcasm; that was taking your assertion at face value. I recognize that others may know more about this. One implication of having superior understanding is the ability to make better contributions contributions to the discussion than calling someone ignorant [1] and asserting that a small RoR matters because leverage. But rather than address the specific error your believe exists, you made an orthogonal claim, obscured with jargon you didn't define (like "ON"). To clarify, my original assertion was that, even if banks had to absorb the entire extra cost of the higher interest rates, that would still be small compared to their return to capital. Do you disagree with that? Is there another mechanism by which the higher borrowing costs translate into higher costs throughout the economy? If so, what is that mechanism? If you have the superior understanding you claim to, then answering those questions is how you can refute the model I presented, and it should be easy with such an understanding. But telling me that your work buddies think I'm stupid -- that does not add to the discussion. [1] "Your last sentence leads me to believe that you are unfamiliar with the normal operations of firms involved in these markets." Later, you said, "If I said at work what you posted about 36bps not mattering I would get fired on the spot. "
      - whatok 7y ago
        Note how I only focused on your assertion that 36bps "does not make a big difference". That is a strong opinion that is not based on market reality and also has several incorrect assumptions baked into it. Based on continued references to "banks eating the cost", you seem to think that banks are the only ones involved in these transactions. They aren't and not understanding that means that it's very hard to understand the life of a repo transaction. The simple mechanics of a repo transaction are easy to explain but there are a lot of individual parts underlying each transaction. The individual parts sum up to a pretty complex beast that is hard to understand. Reducing this to "can't banks just eat the costs?" is borderline misinformation which does no one any good. I previously gave a trade example that is a likely cause (or something similar) of the market events that transpired this week. It's a good example of how 36bps matters (my original point of contention). The NY Fed has a very good guide to the repo markets [1]. Hope these help. [1] https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf https://www.newyorkfed.org/medialibrary/media/research/staff...
deleted 7y ago
[deleted]