We went down the rabbit hole (again) with Jeff Snider, this time to figure out why everyone is talking about Reverse Repos (RRP).
After one email exchange, it was clear that few people actually know why this chart matters (classic FinTwit), so we put it to our contributor network and asked them all the same question, “Why Does This Chart Matter?”
To the standard RRP chart we added US Treasuries because, as Jeff pointed out, RRPs as a standalone statistic doesn’t tell the whole story. We can see on the chart that, on March 18th, right when yields went from reflationary to not reflationary, RRPs picked up, did not come back down to zero as they have always done, and then made their historic run up to today (as of June 14th they sit at $584 billion).
This time around, our contributors’ responses are closely aligned, but each adds their own valuable nuance (which is the exact reason we started this chart's publication).
Jeff Snider | Alhambra Investments
- Conventional theory holds that reverse repo use is a monetary policy accommodation to drain an excess of bank reserves from an overly abundant system. This was how it was used in 2008. But like 2008, there is more going on that has less (if not very little) to do with bank reserves and much to do with collateral scarcity for global repo and derivatives markets. [Editor’s Note: in a reverse repo, corporate and depository institutions receive collateral]
- Briefly, the combination of QE along with Treasury refunding of bills further combined with increased risk aversion left the global monetary system with scant collateral options. [Editor’s Note: with the ‘system’ telling us it’s collateral scarce, i.e., it’s fragile]
- This is why - and the only way - there can be an almost perfect positive correlation between reverse repo use and anti-reflation in bills and LT UST's. [Editor’s Note: this is why we see RRP begin to pick up on the same day that yields begin to flatten and eventually reverse (anti-reflationary)]
- "Too much money" would not produce this effect, one being replicated in markets like Eurodollar futures, too. [Editor’s Note: it’s not about too much money, it’s about not enough collateral]
If you want to see how deep the rabbit hole goes, take the red pill and enjoy the following content from Morpheus… I mean Jeff:
- Emil Kalinowski & Jeff Snider: The Fed's Reverse Repo Program Surges!
- Reserving Observations On The Reverse Repo Of Reserves
- No Reserving Interpretation About Reverse Repo Collateral Connection(s)
Mike Green | Simplify
- The March date matters because this is when the Fed ended the increase in counterparty limits it enacted on a temporary basis in 2020 as the COVID pandemic hit. The ending of the increased limits meant that banks now must hold equity capital against reserves which incentivizes them to “get rid of them” in the overnight market. This increased incentive had the potential to drive rates permanently negative in the overnight market. So the Fed had to be willing to take them rather than force the banking system to absorb them. This gives us the mechanical explanation of what occurred.