Fed's Standing Repo Facility Finally Activates, and Fails To Suppress Repo Rates to Upper Bound

And the 181 Iranian ballistic missiles were a good show, and didn't actually hit anything besides dirt.

• Spent an hour in the bomb shelter last night, but Iran isn't actually trying to destroy anything, just make some noise. No damage, almost no casualties.

• SOFR repo rates break through Fed ceiling of 5% despite standing repo facility being activated to set a ceiling at 5%. It failed.

• Bitcoin to gold fails at the 50WMA.

I'm Fine, Thanks

I'm sure you all heard about the big bad ballistic missile attack by the terrible scary Iran yada yada. Yes it was scary to a point (looked like an alien invasion from here in the Golan actually), and yes I saw the fireworks, and as we saw them in the sky we all calmly strolled over to the bomb shelter until it was all over. Nobody was hurt, and there was almost no damage. Yes there is a military censor which hides any news of damage to military infrastructure, which is understandable during wartime, but everyone in the country has connections to someone high in the army by 2 degrees at most and we all know there is no serious damage to anything vital.

The truth is Iran is specifically trying NOT to damage anything or kill any Jews. They're too afraid of us to do anything serious. They're just making the necessary bombastic noise out of fear for their own lives within their own theocracy. The difference between a Muslim revolution and a Jewish one is that in a Muslim revolution, the leaders get massacred in the streets and every female member of their families, adults and children both, also has the distinction of being gang-raped by an angry mob first.

In a Jewish revolution the farthest we'll go is screaming at one another and the old regime and maybe a few slaps in the face and the old guard will get a very long Time Out in the Corner to Think About What They've Done. (I know that in the Bible it was worse, but we were just a young nation then and we're a lot older now and we haven't massacred one another in a civil war for 2,189 years and counting, so pretty good streak and I don’t think we're going to be breaking it anytime soon.)

We'll see what we do to Iran in response in the next few days, and then maybe Iran will try to actually break something over here. By then maybe the monetary plumbing will break down. Speaking of that...

SOFR Breaks Through Fed Ceiling

No doubt about it. The final clog in the monetary sewers is getting close. The SOFR rate for October 1 just clocked in at 5.05%, 5bps above the upper limit of the Fed's target rate of 4.75-5.00%. Here's a chart I just kajiggered of the SOFR rate minus the upper target rate.

Hard to see but the end of the chart is the first time we're above the target range since March 17, 2020, the first day post lockdown for our health God bless our pharmaceutical overlords forever amen. We're nowhere near the 300bp maximum we saw on repocalypse day but we have to start somewhere. Zooming in around repocalypse day:

There was no particular warning in the SOFR rate that it was about to spike. It jumped to 5bps above target on July 31, a month-end, but the crisis itself was sudden. It will be this time as well.

Fed Standing Repo Facility Did Not Work As Planned

This is also circulating in central banking news. The Standing Repo Facility was tapped for the first time in forever since it was established in July 2021. Not that much, but $2.6B is something. See spike on right.

The SRF is the inverse of the ONRRP (overnight reverse repo facility). The Fed provides overnight emergency cash in exchange for treasury collateral. In RRP, the Fed provides emergency overnight treasury collateral in exchange for cash. Why hit the gas and break at the same time? Because of "friction", which I explained in yesterday's post. Regulatory or governance barriers to lending in bulk for anyone but the Fed due to counterparty risk and such.

Thing is, the facility "worked" in the sense that banks tapped the thing for cash last night, but it didn't work in the sense that it did not suppress the SOFR rate to keep it in line with the Fed's target range. The SRF was tapped at 5% (the upper bound Fed target), but the SOFR still hit 5.05%, so something isn't working as intended. In other words, the SRF will not stop a repocalypse from happening. Probably because of "friction" or something. This is above my pay grade for now as to exactly what is causing the failure, but it doesn't particularly surprise me. (The article below has a few suggestions.)

Here's what the MSM has to say about this "surprise" as the plumbing begins to break down. Picture me rubbing my hands together wide-eyed with an evil smirk and licking my lips. I'm not actually doing that but I am smiling wryly. My bold.

What was less expected on Monday was the action at the Standing Repo Facility, or SRF.

The SRF was established in 2021 to allow eligible financial firms to hand over bonds to the central bank in exchange for quick cash. The facility was envisioned as a quick way to get liquidity to markets and as a safety valve in times of stress, saving the Fed from having to intervene in markets to keep rates in line with desired levels.

Thus far, the SRF has seen little more than testing. Monday’s inflows were different, however, and while modest, they represented the first real usage of the facility, market participants said.

“This is very much a good-news/bad-news story,” Wrightson ICAP analysts told clients. The upside is that the facility finally got used, while the downside is that it got used at a 5% rate when broader repo market rates were notably higher, which suggests the facility did not put an “effective ceiling” on rates, the analysts said.

Scott Skyrm, who leads money market trading firm Curvature Securities, noted the jump in market rates the SRF failed to blunt was “reminiscent of the volatile days of 2018 and 2019 that culminated with the repo panic of Sept. 2019.

Skyrm added one reason why the SRF may not have blunted the market rate rise owes to timing. Traders and investors sort out their needs in the morning whereas the daily SRF operation takes place in the early afternoon, after the market has already struggled.

Analysts at Barclays Capital said the SRF jump reflects a market where demand for short-term secured financing is rising amid an outlook of Fed rate cuts. And that could bear directly on the Fed’s ongoing efforts to shrink the size of its balance sheet via what’s called quantitative tightening, or QT, a process in which the Fed allows bonds it owns to mature and not be replaced.

“Funding demand exceeds 2019 levels across a number of metrics, which suggests the Fed may need to end QT sooner even if reserves are still abundant,” (Rafi's note: HA! HAHA! Are we going from a "regime of reserve scarcity" to a regime of "abundance" to a regime of "super schmooper abundance"???) Barclays said. As of July markets were eying a spring stop to QT.

The final sentence of this article had me laughing out loud:

Over recent days both Fed Chairman Jerome Powell and Roberto Perli, who leads implementation of monetary policy at the New York Fed, have suggested that QT still has quite a bit of life in it amid still abundant market liquidity.

In the last EGI I had specifically quoted Perli's speech and how he thinks everything's hunky dory in the plumbing and why he's so wrong. Seems I'm not the only one pointing this out.

The End Game beckons.

Bitcoin in Gold Terms Appears to Have Failed at 50WMA

We've had a pattern of lower highs and lower lows since March. The high was way back in October 2021 at 37 ounces. If bitcoin cannot reclaim the 50WMA here, the next target is the 200WMA at 20. During the final dollar crunch, gold will get hit, silver even harder, but the hardest hit "asset" or at least among the hardest hit, will be bitcoin and its blockchain buddies. Gold will recover the fastest, and my guess is that bitcoin will not, at least not relative to gold certainly. By then it will start to become clear to the masses that gold is money, and bitcoin is a derivative of a derivative of money.