Overnight reverse repurchase agreements (Repos) are spiking.
For y’all Robinhood users here’s a quick synopsis. Under a regular repurchase agreement by the Fed and a major bank, the Fed essentially puts liquidity into the banking system by exchanging cash (that can be used right away) for U.S gov’t treasury bills (that are usually dated out 2, 5 or 10 years). In a reverse repo, the opposite happens. The Fed exchanges U.S gov’t treasuries for cash, essentially removing liquidity out of the banking system.
Commercial bank’s are required to keep what’s known as a reserve requirement to ensure liquidity. As deposits (from people making more money as a result of new money being printed) into banks increases, the amount of capital a bank must keep as a reserve also increases.
The problem is, banks can’t loan out capital that’s being used to meet reserve requirements.
Additionally, in March of 2021, the Fed ended the rules that relaxed the supplementary leverage ratio which allowed banks to exclude treasuries and deposit from their reserve requirements which means banks are now (once again) required to hold more capital for reserves.
In order to loan out these new deposits, Banks are telling their corporate customer’s to put their money in money-market accounts (since these don’t require banks to keep capital as reserves). (See: [https://www.ft.com/content/a5e165f7-a524-4b5b-9939-de689b6a1687](https://www.ft.com/content/a5e165f7-a524-4b5b-9939-de689b6a1687)) . As a result of this, the size of money market funds are increasing dramatically. ([https://www.financialresearch.gov/money-market-funds/us-mmfs-investments-by-fund-category/](https://www.financialresearch.gov/money-market-funds/us-mmfs-investments-by-fund-category/)).
Money-market funds buy short dated U.S treasuries (t-bills), but as the demand and use of these funds goes up, the supply of U.S treasuries is decreasing.
This is why over-night reverse repurchase agreements are spiking. Banks are exchanging their cash for these short dated treasuries.
At the same time, the Fed is buying over $80 bln worth of U.S treasuries a month ([https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details](https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details)), and at the same time the U.S treasury department is underwriting less short dated bonds (in favor of 2, 5, and 10 years) to make long term debt cheaper.
This means that either the T-bill market is going to squeeze. Or (the more likely outcome) is that the Fed slows open market operations, and removes liquidity by raising interest rates earlier than expected.
My bet is emergency rate hike before Sept. The U.S debt ceiling requirements are kicking back in at the end of July as well.
This will probably cause a drop in the equities, but idk what do y’all think?
tl;dr: That guy buying the $40 $SPY 7/16 puts might be onto something.
edit: SPY $400 NOT $40 jfc