Repos Gone Wild!

Repo volume spikes by half a TRILLION during quarter-end all night monetary rave. Repos to reserves surge to 80%. Fed yawns furiously. And why RRPs may not need to fully drain to bring on final clog.

• Repo volume surged by $446B to a record $2.523 trillion, driven by quarter-end book-balancing, pushing the SOFR rate up by 12 basis points.

• The Fed's SOMA account manager, Roberto Perli, says everything is fine. Underestimates repo market pressures, despite a significant rate spike.

• Perli notes in a 9/26 speech that frictions in the repo market, such as counterparty risk limits, may prevent RRPs from being fully loaned out.

Giovanni Swastika/iStock via Getty Images

Repo volume surged by a stupendous $446B last night and clocked in at $2.523 trillion. That is a surge of 21.5% from the last reading, and is a new all time record high. It's the biggest daily jump in repo volumes both in absolute and percentage terms ever. The previous high was $2.403 trillion on the first business day of the month. The surge was particularly high because yesterday was quarter-end, which makes the book-balancing even more extreme. It's also why reverse repos have surged back to $465B.

The effect of money being stuffed back into the RRPs plus the quarter-end is overloading the repo market and has pushed the SOFR rate higher by 12 basis points up to 4.96%. That is barely within the Fed's range, upper bound being 5% after the 50bp rate cut two weeks ago. The 75^th percentile and higher of repo loans on September 30^th however have broken above the Fed's target. See below:

Repos to reserves ratio has catapulted up to 80%, repocalypse territory somewhere around 85% or so, assuming RRPs are empty since they can usually be used to fund repo loans if rates get high enough. (Though maybe not, more on that next section.) We're definitely getting there. Just a few more weeks now it seems, barring something wild and random.

Repo volume will come down over the next day or two as it always does after month end, but volumes will continue to trend higher anyway, and the next calendar spike for whatever reason could lead to a repocalypse situation. We're close enough already.

To give you an idea of how clueless the Fed is on this issue, the manager of the Fed's SOMA account (the account they use to screw around with the open market), a guy named Roberto Perli, had this to say in a speech given September 26:

"For now, pressures in the repo market don’t appear to be close to the point where they would start affecting the federal funds rate. For that reason, I believe there is plenty of room to continue shrinking [the balance sheet]."

Well well, if pressures in the repo market don't appear to be critical, why did rates just spike 12 basis points, eh?

Something's going to crack soon and they'll reverse course like the Titanic, and hit the iceberg anyway.

Maybe Not All RRPs can be loaned out?