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Can someone provide a ELI5 for this?

• carapace 5y ago
  Riiight? I read that and my reaction was Red Dwarf Cat "What is it?" https://www.youtube.com/watch?v=BLc5mvOGgxc https://www.youtube.com/watch?v=BLc5mvOGgxc
• hall0ween 5y ago
  Don’t quote me on this, pretty sure I’m wrong. The Fed bought assets (with the agreement to give it back for even higher rates of return). I heard one interpretation of this being that the moneys worth less than the assets and the fed is looking for ways to incentivize financial institutions to take money.
  • ganoushoreilly 5y ago
    Yes, govt bonds are looked at as not reliable and the fed is incentivizing the purchase of the bonds nightly with additional interest. Problem is this is to stave off excess inflation, but it ironically will create it.
  • wtn 5y ago
    > the fed is looking for ways to incentivize financial institutions to take money Right, the current situation is a money market "plumbing" issue; there are more deposits than banks can handle due to GSIB balance sheet regulations. Here's some background info: https://fsforum.com/news/fixing-whats-broken-the-gsib-surcharge-near-and-long-term-problems https://fsforum.com/news/fixing-whats-broken-the-gsib-surcha...
• rawtxapp 5y ago
  This was a good and simple explanation on why this might be happening: https://www.youtube.com/watch?v=O0fSPO7AW7k https://www.youtube.com/watch?v=O0fSPO7AW7k. tl;dw: too much money in the system, big banks don't want the liability, push it to money market funds which use short term treasury while treasury is trying to increase their long term debt and reduce the short term ones. essentially, not as scary as it sounds.
  • jnorthrop 5y ago
    Great link. Thanks
  • MuffinFlavored 5y ago
    > big banks don't want the liability How is holding lots of cash a liability?
    • choeger 5y ago
      Well, banks do not hold cash. Cash is always held by the central bank (that's where the other banks have their accounts). Nowadays, this can easily involve negative interest rates. So if a bank now buys some security back from the central bank, they effectively remove money from the system (and get that security in return).
      • MuffinFlavored 5y ago
        > Nowadays, this can easily involve negative interest rates. Source? Does it? I thought negative interest rates were a thing in the EU but not in the US yet?
        • jkhdigital 5y ago
          The Fed is adamant about preventing negative rates, which is in fact what the reverse repo facility is accomplishing--if market participants could not go to the Fed and had to conduct repo with banks, then the overnight repo rate could easily go negative when there's too much cash sloshing around.
    • rawtxapp 5y ago
      It increases their regulatory obligations without increasing their profits.
    • ketzo 5y ago
      Because it's not actively generating value, and is in fact actively losing value thanks to inflation. It's legally considered a "liability" in the context of a lot of banking regulation.
• newaccount2021 5y ago
  The world economy is a ponzi scheme played out over a very long term
• ganoushoreilly 5y ago
  First, it's been at 500 or so for a few weeks this is a substantial jump. The previous high record was $589 on the 14th. This has never been this high. But more than likely you need to understand what Reverse Repo is and why it impacts all of us. Here's a great ELI5 On Reddit. https://www.reddit.com/r/investing/comments/1ixbwf/eli5_repos_reverse_repos_bonds_how_they_correlate/ https://www.reddit.com/r/investing/comments/1ixbwf/eli5_repo... TLDR: More inflation and shakey times ahead.
  • eightysixfour 5y ago
    The jump is substantial because the Fed raised the interest rate on overnight reverse repos from 0% to .05%, so the demand skyrocketed.
    • izend 5y ago
      Note you are off by a magnitude: "as it raised the rate on its overnight Reverse Repo facility from 0% to 0.05%"
      • onlyrealcuzzo 5y ago
        That is an annualized rate, right?!
      • eightysixfour 5y ago
        Thanks, I've edited it.
• guffaw5 5y ago
  Banks have a ton of cash, and they're worried about inflation. So, they store their cash with the fed (through a repo [repurchase] agreement) temporarily. [0] What is a repo? - https://www.richmondfed.org/publications/research/econ_focus/2020/q1/federal_reserve https://www.richmondfed.org/publications/research/econ_focus... [1] Repos in charts - https://fred.stlouisfed.org/series/RRPONTSYD https://fred.stlouisfed.org/series/RRPONTSYD
  • MrStonedOne 5y ago
    That does not explain what a reverse repo is.
  • wtn 5y ago
    The immediate situation is a problem of money market funds having more inflows than they could allocate (without nominal losses) in a zero interest rate environment. It's not about inflation per se.
  • ffggvv 5y ago
    that doesn’t really explain why they’d give the fed money for 0 percent interest if they are worried about inflation
    • dragontamer 5y ago
      A 30-year bond is 2.20% APY yesterday. If inflation happens, the 30-year bond will likely rise with inflation: maybe 3% or 4%. It is better to store your cash today, than to "lock in" to 2.2% APY. Next month, if inflation starts to kick in, maybe you'll get 3% over the next 30 years instead of 2.2% over the next 30 years. ----------- Obviously, a 30-year bond is 'different' than cash. However, when you start looking at 6-months, 3-months, 1-month, and overnight lending rates... things look more-and-more like cash. No one ever holds "cash" per se, its always better to lend it out (even for only 1 day, you wanna have that cash generate more cash). By betting on shorter timescales (ex: 1-month), you're really betting that the longer-time scale bonds (ex: a 30-year) will rise up.
  • MuffinFlavored 5y ago
• rbx 5y ago
  the banks have too much cash and not enough collateral (typically bonds). The FED lends them the bonds for one day (reverse repo) so that their books look ok at the end of the day.
• dmw_ng 5y ago
  https://fed.tips/sico4-1/ https://fed.tips/sico4-1/ This relates to scarcity of short-duration treasuries, it's mostly a scary sounding non-event
• BenoitEssiambre 5y ago
  Central banks raised interest rates a tiny amount from 0 to 0.05%. Banks were like: we no longer want to borrow all this cash we weren't doing anything with anyways please take it back central bank.
  • BenoitEssiambre 5y ago
    To add to this, central banks don't lend out cash without banks pawning an asset in return. And they only do so on a limited time basis. The banks have to promise to repurchase the pawned asset at a certain date, hence the name "repo" (reverse repo from the central bank's perspective). Central banks are basically pawn shops that get to create their own cash to lend out.
• jkhdigital 5y ago
  At a very high level, this is one among many Rube Goldberg-esque interventions in financial markets that the Fed uses to try and whip markets into behaving how it wants. In more concrete terms, banks (i.e. members of the Federal Reserve System) keep USD reserves on deposit at the Fed. The only thing they can do with these reserves is loan them overnight to other member banks at a market-determined interest rate--the Federal Funds Rate--which is targeted to a certain range by the Fed's policymaking committee. The Fed also pays interest on these reserves, at two rates: one rate for required reserves, and another for excess reserves. These serve to put a floor under the FFR, since there is no reason to lend reserves at a rate below what you can get by just sitting on them. Of note is the fact that only Fed member banks have access to this, so other financial institutions must go through the banks when they have excess cash to park somewhere. In essence, the bank can accept overnight cash from non-banks and split the IOER with them. This transaction is consummated through a repurchase agreement (repo) in which the bank sells a "safe" asset to the counterparty with an agreement to buy it back soon thereafter (often overnight, but potentially up to a year later) for a slightly elevated price. The price difference is effectively the counterparty's cut of the IOER accrued during the time that the bank was sitting on the cash. Repo transactions are used for all sorts of short-term funding needs among non-banks, so the overnight rate on high-quality repo is roughly equivalent to the FFR. It is for this reason that the Fed started its reverse repo operation, whereby it offers basically the same deal that I described above to certain qualified non-bank counterparties, in order to set a floor on overnight repo rates. (You can ignore the "reverse" in the name; it just means that the Fed is the one lending securities in the transaction.) The Fed is extremely wary of negative interest rates and the effect they might have on market behavior, so reverse repo appears to be the preferred method for preventing this. So what does it mean when usage of this facility skyrockets? Well, it means that banks are not willing to engage in overnight repo at the rate that the Fed is offering, which in turn means that there is suddenly a large imbalance between repo supply (high-quality lendable securities held by banks) and demand (idle cash held by non-banks). As to what that fact means for the near future, opinions may differ sharply. Banks essentially make money by arbitraging time preferences--they borrow short term (e.g. demand deposits which can be withdrawn at any time) at very low interest rates, and lend long term for much higher rates to risky ventures. They realize a profit by earning a sufficient spread between these rates to offset losses due to counterparty risk (i.e. default) on their lending. One consequence of this model is that a bank may abruptly become insolvent due to short term market conditions, if it cannot roll over its sources of funding. Since financial assets can typically be liquidated quickly (as opposed to, say, a bunch of idle factories owned by a defunct manufacturer) this can lead to systemic instability when an insolvent bank is forced to sell everything and drags down the prices for assets held on other banks' balance sheets. After the GFC, regulators decided to come up with a more nuanced set of rules about how "healthy" a large bank's balance sheet must be, in order to spot trouble before it exacerbates a liquidity crisis and produces a solvency crisis. A business's leverage ratio is basically capital (equity) divided by assets (or its inverse, depending on your framing). For banks, however, just looking at leverage is not that helpful since the assets being held have very different levels of risk. The new metric is the Supplemental Leverage Ratio (SLR), which includes off-balance sheet exposure. Notably, the bank's reserves at the Fed as well as holdings of US Treasuries are normally included in the denominator (risk assets), but at the start of the pandemic an exemption was put in place so these could be excluded, thereby boosting the leverage ratio and allowing banks to engage in more lending than would otherwise be allowed by the normal SLR calculation. However, the SLR exemption has now been allowed to expire, and thus banks must tighten up their balance sheets to avoid the severe restrictions of a low SLR. We are now squeezed between the Scylla and Charybdis of financial regulation and monetary stimulus, as the Fed engages in QE to encourage lending towards riskier economic activity while simultaneously imposing leverage constraints to prevent large banks from posing systemic risks. The Fed's reverse repo has become the pressure release valve, as banks are completely hamstrung by their inability to offer negative rates so everyone is now going straight to the Fed for their overnight deposits. Ironically, this is essentially a (short-term) negation of the Fed's QE activity, as the Fed is simultaneously purchasing assets as well as lending them out on an ongoing basis. In other words, the market is sending a pretty clear signal that QE is really unnecessary at this point in time.