INSUBCONTINENT EXCLUSIVE:
By Brian ChappattaImagine you are a long-time Wall Street denizen, accustomed to analysing trends in the public equity markets, sovereign
interest rates, foreign exchange and corporate credit
You think you have a good handle on all these large asset classes.
But suddenly, the plumbing of the entire financial system goes haywire in
mid-September, and no one knows why
You are fielding questions about the overnight repurchase agreement market and whether this is another banking crisis in the making
Scouring previous research, you see that one analyst at Credit Suisse AG was warning about a potential repo squeeze before this episode
If anyone had the bonafides to diagnose what ails the short-term funding markets, it certainly seems as if it would be him.
Those past
uncertain terms.
Predictably, these comments rocked Wall Street, especially among those who traffic in financial doomsday scenarios
The report was seemingly so widely read that a reporter asked Fed Chair Jerome Powell at his December 11 press conference what extra steps
the central bank would take to address year-end funding pressures in FX swaps and repo markets
Perhaps understanding the origin of the question, Powell said the central bank was willing to purchase longer-dated Treasuries if
14-day term repo operation on December 19 and then $28.8 billion in bids for a 15-day term operation on December 23, both less than the $35
By contrast, the first four term offerings for year-end were oversubscribed
anxiety over another funding squeeze.
Few strategists are willing to sound the all clear just yet, given the unexpected tumult just a few
It still looks as if repo rates will lurch higher on December 31, but perhaps not to an unmanageable degree.
Suffice to say, few if any are
particularly thrilled with the way the Fed has handled the repo market in recent months
As I wrote last month, it seemed as if central bankers were simply throwing the kitchen sink at funding markets and hoping it would be
of term repo operations to provide funding through January.
Pozsar, in the Businessweek profile, seemed to walk back his call for QE4 and
past year-end would be enough of a victory
The structural issues that Pozsar flags, like incentives within global systemically important banks to cut back on market-making in the FX
Policymakers are advocating for a standing repo facility to alleviate any funding strains, with St
Louis Fed President James Bullard and Dallas Fed President Robert Kaplan each saying in recent weeks that they want to see that come
together next year.
Getting into the New Year without a massive disruption would be a victory for all of Wall Street
As I wrote during the September chaos, repo is not something that every investor needs to understand in-depth
Not to jinx it, but it looks as if the sun will rise come 2020
(This column does not necessarily reflect the opinion of economictimes.com, Bloomberg LP and its owners)