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The rise in reverse repurchase agreements will lead to an emergency rate hike.

Overnight reverse repurchase agreements (Repos) are spiking.

[https://fred.stlouisfed.org/series/RRPONTSYD](https://fred.stlouisfed.org/series/RRPONTSYD)

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.

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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.

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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.

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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.

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This will probably cause a drop in the equities, but idk what do y’all think?

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tl;dr: That guy buying the $40 $SPY 7/16 puts might be onto something.

edit: SPY $400 NOT $40 jfc

What do you think?

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23 Comments

  1. There is 0% chance of a rate hike in September. First step of tappering would be that the Fed will reduce its bond buying program. There wont be a rate hike this year

  2. can someone explain how this isnt an unsustainable circlejerk? im not smart so im probably missing something and genuinely dont understand, this is how im perceiving the situation:

    federal government prints treasury bonds (basically low yield loans that promise interest to buyer after X amount of years)–>federal government prints cash dollars–>federal government sells treasury bonds to banks in exchange for the cash dollars it just printed–>now federal government changes rules to incentivize or force banks to sell back the treasury bonds in exchange for the cash it just printed

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    like what the fuck does this mean?

  3. Could things get screwy yes will the feds taper bonds all of a sudden no. How do I know because it would cause disorder. They would rather have things kind of fucked up and be wrong but have order then chaos. If you don’t believe me time will tell rate hikes and bond tapering 2023 like planned.

  4. They need to hike rates, they are chasing their own tail trying to avoid it and I can’t really see why. But this particular Mr Market can remain irrational far longer than any retard can remain solvent.

  5. This is similar to my analysis, From a different end.

    FY21 GDP is projected at 7% growth
    Jobs are up
    Inflation is here
    And shrinkflation in staples is here too
    Homes prices are at all time high

    Interest rates may go up, reverse repo may slow down????

    But securities will continue to do well, because the inflation is caused by true growth, the US is back baby!!!!

    Now, the only way securities will dip in my opinion is if the fed overreacts/over adjusts. They have to tap the breaks not press down.

  6. My understanding is that RRP is borrowing treasuries from the fed for a small bone (upped from 0 or negative recently, because losing money is bad business). I.e. it doesn’t not get squeezed like you think. But MMFs have some sort of upper limit they can run into. 80B per fund? This limit needs to be lifted IIUC.

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