What to Ignore Wednesday – How About $359Bn of Repo Failures?


Even these days, that seems like a big number, right? It's not on the chart but you get the idea, the last time repo failure leaped up like this was ahead of the great crash of 2008 but why worry?  Both mini-spikes last year led to big market pullbacks but Trump's election saved us and now we're just happily ignorning over $1 TRILLION in failures in the past 3 weeks alone.  

A “ repo fail” is pretty simple and straightforward; when the obligation of any seller to deliver agreed upon securities remains open following the close of business on the agreed date of the transaction.  These are, after all, repurchase agreements, which means exactly what the name implies; I buy bonds from you today and agree to sell them back tomorrow (or whenever).  If I don’t sell them back to you tomorrow, we have a fail.  The reason for them relates to what repurchase agreements actually are; collateralized short-term loans, mostly overnight. They are structured as repurchases for historical reasons that since the 1980’s have been superseded by this reality.

In 2008, this relationship was very easily established; T-bill rates in particular would trade in equivalent yield far less than they otherwise “should” given money substitutes (such as the IOER). Bill rates fell sharply in the wake of Lehman’s insolvency, and repo fails exploded into what is now the textbook (well, one not written by an Economist, anyway) case.  Thus, whenever we find an outbreak of fails it is for various reasons a tightening of collateral conditions. Some prove innocuous; most do not, especially any that would linger.

Something is hindering the flow of collateral – what it is remains to be determined…

Image result for equifax hackI know there's a lot to keep track of but let's remember that Equifax was hacked and, if you are a US citizen who has ever applied for credit, then ALL of your personal information is out there.  Well, not ALL – just the stuff they ask you for on a loan application.  This morning we just head from Yahoo that 3 BILLION customer records were hacked at that company and, of course, there's the Wells Fargo nonsense – which shows you what
continue reading