A critical part of the financial system called the repo market has become the subject of billion-dollar interventions by the Federal Reserve starting in September 2019. These interventions have continued as recently as mid-November 2019. These unexpected actions reveal major complications with the current state of the financial markets. Learn more in this episode of USMR Market Insights with Coy Wells.
What Is the Repo Market and Why Is the Fed Spending Billions on It? – Video Transcription
Coy Wells: 00:00
Billions of dollars were shot into the financial market by the New York Federal Reserve in a surprise overnight move on September 16th. The very next night billions more were administered. In the months since then, these overnight billion-dollar injections became a semi-weekly occurrence, and why is this the case? The trouble began in the overnight repo market. This is where holders of treasury bonds or similar assets sell them for cash value with an agreement to repurchase them. The assets are then repurchased very quickly for slightly more cash and trillions of dollars frequently flow through the system overnight. However, in mid-September, the system grinded to a halt. The main reason is banks and other asset holders were unable to sell these assets at a normal rate. Rates rose to a level where the banks would not be able to buy them back with enough cash. This is in large part due to the financial deadlines for financial institutions and something called the liquidity coverage ratio or the LCR.
Coy Wells: 00:55
Among the rules enacted after the 2008 financial crisis, the LCR is a law intended to keep bank solvent. This requires them to keep a certain amount of cash in the reserve accounts to absorb any economic stress. Banks have stated that they wanted the amount of money they hold in reserves to be lowered. They argued this would free them up for putting more cash into the repo markets. The Federal Reserve has disagreed, Federal Reserve Chairman Powell stated in October that the fed would rather provide the banks with more cash by buying back securities than lower the liquidity rates. They also said they would buy about 60 billion a month in treasuries for an unspecified period of time. Since then, the fed has continued to buy back bonds and large sums as recently as early November. On November 7th, they injected over $115 billion into the market by buying treasuries and mortgage-backed bonds. It is unknown how this process will continue as the fed has not yet announced a formal end of these proceedings.
Coy Wells: 01:52
Please call the number on your screen to receive U.S. Money Reserve's special report, U.S. Stock Market Crashes: Lessons from the Losses. This report provides many of the causes of previous market crashes. So click on the link below, or call the number on your screen right now so you can get your copy and please give us your thoughts and share this video. Please subscribe to our YouTube channel so you don't miss a single episode of Market Insights. I'm U.S. Money Reserve's, Coy Wells, and thank you for watching Market Insights.