Clog Incoming - Repo Futures For Dec 31 Already Priced 100bp Above Fed Target Range

What will the $7 trillion in money market cash slam in to when rates must be cut to zero? Gold. And silver.

• Repo market rate futures are spiking due to year-end regulatory burdens, with overnight repo rates reaching 5.60% for 12/31.

• Barclays warns the Fed's Standing Repo Facility is inadequate and doesn't address about $800B of daily repo volume.

• The national debt has surged by $1 trillion in less than 4 months. Sounds fun.

• Basis trade alleviates slightly.

Bloomberg is reporting that the financial plumbing is already tightening leading up to the year end turn as measured by repo futures trading. Here are excerpts from the article:

The rate on overnight general collateral repurchase agreements for year-end — or loans collateralized by Treasuries — and those backed by mortgage-backed securities are soaring. The spike has some on Wall Street preparing for even more volatility as year-end regulatory burdens drives some of the largest participants to the sidelines of the repo market.

This is the first time in years when worries about the turn of the year “have started to get priced in so early,” said Jan Nevruzi, a US rates strategist at TD Securities. “Clearly there are bottlenecks that will get worse with year end.”

Trading in overnight repo for the Dec. 31 to Jan. 2 period traded as high as 5.60% last week and has since retreated to 5.45%, according to Curvature Securities. That’s up from 4.85% earlier in the month. At the same time, repo backed by mortgage-backed securities rose to 5.69% on Wednesday, higher than where it traded on Nov. 15, 5.65%/5.55%.

$147 billion of Treasury auction settlements on Dec. 31 — about 25% larger than ones on Sept. 30 — and banks paring repo trading in order to tidy up their balance sheets for the year-end regulatory snapshot.

Reminder that the fed funds range is 4.5 – 4.75%. 5.6% is almost 100 basis points higher than the Fed's target range.

$7 Trillion Interest Rate Bomb

Bloomberg also reports on the $7 trillion in money market funds that will be forced out of the money markets if and when the Fed is forced to cut back down to zero during the final plumbing clog and those money market funds are suddenly earning nothing while price inflation rages. It's this ungodly amount of money that will mechanically force the acceleration into the End Game, in my view. The trillions will flood into gold more than anything else (stocks will also go up of course but not by nearly as much) and that will cause bleeding from other assets into gold as well.

Barclays Also Sounds the Plumbing Alarm