OMG! You Wont Believe What Just Happened in the Repo Market

Repo, it's back or more accurately never really went anywhere. But when we last left off, it seemed like things were calming down, which is not unusual in these circumstances. However, it didn't mean it was a one off or a one time thing. It's just that it got to the middle of the month and it wasn't a whole lot going on. But now that we're heading into the Thanksgiving holiday and staring into December, things are heating up all over again. We've got elevated repo rates. We've got more borrowing from the Fed's repo facility. And in very much related developments, it is getting spicy in the hedge fund private credit world as well. In fact, over in the latter and private credit, there's an escalating war of words between banks and shadow banks or bankers and shadow bankers. It's no longer just Jamie Dimon versus Blue Owl. UBS's chairman had some harsh statements, and he's singling out a traditional class of financial giants that maybe you wouldn't think would be caught up in all of this shadow banking drama. Unless, of course, you were paying attention to 2008 and the reaching for yield that was building up here in the 2020s. Then you know exactly who I mean. And yes, this does involve ratings agencies, because of course it does. No two credit cycles are ever the same, but darn it if they don't often feature the same cast of characters. So repo rates and Fed borrowing aren't the only ongoing signs of stress and strain. There are a few others beside those, including one that we watch very closely and another market signal that I do want to go over because it's looking not better and better, but more correct than not. So repo, don't call it a comeback because it didn't go anywhere. The problems in it are just becoming more mainstream visible once again, for what should be more obvious reasons, especially as we continue to get more drama, really spicy drama out of the private credit world. And we're not even just talking about cockroaches anymore. We're getting on into the real thick of the issues that will just have you shaking your head. But before we jump back into that monetary and financial mess, I think it's important to set the stage first. Let's take a quick look at where some of these key market signals are, given everything that's going on around them. Bull steepening on the yield curve. I went over that in yesterday's video because that's a big one, a critical signal. And everyone missed it because social media and the financial press, they both spent their summer screaming about sell America, treasury rejection and tariff inflation. Meanwhile, the yield curve has been readily and steadily bull steepening since all the way back in February, nine months. Had anyone known about it during the summer, it would have, to most people, sounded out of place. I mean, defensive, deflationary, lower rates, stocks were soaring. The dollar was being, many claim, massively debased, at least according to the crypto crowd. But now as we head into the final stretch of the year, the bull steeping on the curve actually makes a hell of a lot more sense. Remember, the point I'm making here, it was a leading indicator. At best, stocks are laggard and more times than not, they're just completely misleading. Whereas the bull steepening was leading everyone in a specific direction for a specific set of reasons that we're beginning to see more clearly. And another critical signal that we go to all the time, copper to gold. And this one might be surprising too, because gold is not, well, I mean, gold has struggled a little bit here, as it's come off its highs, and it's still due, in my opinion, for a fuller correction. But even with gold down from the high, the copper to gold ratio remains just a few fractions of a fraction from its record low. And this is another one that seemed to be way too negative during the soaring summer sun in stocks. Like the bull steepening yield curve, there was no second thought here. The only detour in the ratio came when the copper prices were squeezed massively higher on those tariff threats that once they were cleared up at the end of July, the ratio was right back to where it had been before, sinking down toward those record lows that it eventually reached. So just to be clear, low copper to gold is bad, bad news. Being even lower than 2008 and 2020 doesn't necessarily mean that markets are persisting for some kind of major 2008 style rerun or another period of lockdowns like in 2020. What the ratio tells us instead is that the longer run future is one with very limited upside and tremendous overwhelming downside. At record lows, it's basically saying there is no upside and that includes tariff inflation or any kind of inflation because copper to gold at this level is a deflationary signal and as strong of one as you'll ever find anywhere. Historically validated, all that stuff. So while it was dropping in the summer, it may have seemed to be way out of line with the rest of the world or at least the rest of the mainstream view of the world. But it wasn't out of line with the majority of these markets and market signals. They just don't include stocks and the mainstream which has been conditioned to believe stocks are the only view that matters into that financial world. But now a few months later, we've got job losses and debt. We've got private credit being talked about everywhere. We've got repo messes, cockroaches, garbage lending. Suddenly record low copper to gold, like persistent bull steeping on the yield curve. The signal doesn't seem so far-fetched after all, does it? And just a reminder, as we go through all these monetary mechanics and esoteric indications, this is why Eurodollar University exists. To fill in all of these huge gaps that have been left behind by central bankers and economists and of course the mainstream. And we are having our Black Friday sale that has already begun. There's a link in the description where we have the best prices available on our DDA Plus subscription which gives you our deep dive analysis where we go deep into all of these topics, what they are, what they mean, the background behind them, what it tells us about the situation and maybe give us a sense of what things are going to happen moving forward. In addition to the deep dive analysis, you get our membership, our daily briefing that gives you everything that's going on each and every day. Plus our one big weekly theme at Substack and a bunch of other things beside. Huge value, tremendous savings. Like I said, a Black Friday sale. There's a link in the description. Check it out. So with that in mind, let's catch up on the repo situation. So borrowing at the Fed's repo facility began to pick back up yesterday with a total of $10.6 billion mostly on NBS Collateral. The facility had gone basically unused the four prior days, really five with only a test million dollar draw on the 18th. But as I said before, that's not unusual. Going back to the 2019 situation, repo rates and tightness would go back and forth with clear monthly patterns to it. But back then, the spike in rates and activity tightness would show up at the start of each month. This time around, it seems to want to pick up toward the end of every month and hold over into the next one or the following one. So in addition to the $10.6 billion that was borrowed yesterday from the Fed's repo facility, there was another $14 billion borrowed this morning so far. And that's with another afternoon auction, which is being closed roughly around the time that I'm recording this video. We're at the Thanksgiving holiday, which means for all intents and purposes, the markets are going to be mainly closed from here until Monday. So yeah, I mean, there's some stuff that's open Friday, but it's light and no one will take any chances. They're not going to bet on a potential Friday need to raise funds. They're going to do it today. Now, as far as the wider and more important repo market beyond borrowing strictly from FRBNY is concerned, the benchmark repo rate has continued to be elevated the entire month, even when there wasn't anything going on with the Fed's facility. SOFR, which is the Secured Overnight Financing Rate, and which it's no substitute for the far superior LIBOR, but we don't have LIBOR anymore. The SOFR benchmark rate was up around 4% and equal to the federal fund's upper limits several times in the middle of November as recently as the 17th. Now the lowest in the SOFR rate, the lowest it got was 3.91% last week before it started to move back up again Friday and then Monday. And as of yesterday, the latest calculation that we have, because the bureaucrats in New York don't see any need to give information at the speed markets actually operate, yesterday's SOFR rate was 4.01%, which means repo rates were moving back above the upper bound for the first time since back on November 3rd. So escalating tightness across the repo market. And that's roughly on the same schedule as we saw in October. SOFR didn't breach the Fed fund's upper limit until October 27th. It's a good guess that today's SOFR rate, given what we're seeing in the marketplace and everywhere else, today's SOFR rate is probably going to be substantially higher than 4.01% as well. And just to be clear, the Federal Reserve does not specifically target the repo rate or any repo rate because there are actually several. In reality, there's no single repo market. There are actually several of those. In one segment, we almost have no idea what's going on in it. We're simply making what we hope are reasonable assumptions that what we see from these parts where we do have information, those that go into SOFR are a close enough proxy for all the rest that's going on out there in the Eurodollar black hole. So even though the Fed doesn't target the repo rate or any repo rates or benchmark of repo rates, officials at the Fed know only too well that repo is what matters, not Fed funds. Fed funds is a fraction of repo. So while officials do target only Fed funds, they also know what happens in repo matters more and it can and does interfere with Federal funds too, just like in 2019. And for the record, the effective Federal funds rate yesterday was 3.88%, which is still creeping higher within the range and it's being pulled upward by this tightness in these money markets like repo. Of course, the immediate question most people ask after they get out of the way, what is repo and why is it so big and why are there so many repo markets is what is behind all of this? What is the real reason why we're seeing tightness in repo markets to the point that it's spilling out into publicly published repo rates that the Federal Reserve actually pays attention to? And the answer you're going to hear, as I've talked about before in these videos, is QT. It's the Fed's balance sheet runoff and bank reserves. So we don't need to rehash the argument over bank reserves here. I've done that before in those videos. What I will say is that even though you'll hear this from every last mainstream source blaming QT, the Fed's balance sheet reduction level of bank reserves, for the record, the balance of bank reserves here in November has increased at least through last week and it's increased by roughly 40 billion from the end of October and still we're seeing the repo mass coming back and making the same waves that it had before. The truth is we've been documenting other signals of monetary tightening all across the Eurodollar system and Eurodollar behavior long before we even got to October. A big one comes again from FRBNY. The Fed's New York branch holds U.S. Treasury Reserve assets in custody on behalf of their foreign official owners. These are reserve managers, foreign governments, overseas central banks and the like. Whenever the Eurodollar system gets to be tight, meaning money in all of its forms and through all of its various venues, the multiple repos that I mentioned, currency derivatives, whatever. When Eurodollar ledger money gets to be tight, foreign reserve managers do something with their reserve assets. It's not political. It's not sell America. It's pure monetary mechanics, which actually makes sense. The entire point of having reserve assets is to be able to use them in conditions just like this, when the Eurodollar isn't behaving the way that everybody needs it to. So these officials sell some of the reserve assets, primarily U.S. Treasuries. Boom. They've got liquid ledger cash that the foreign government can then immediately supply to the local market that might be struggling to obtain ledger dollars because the Eurodollar market is tightening. And this year it's been huge. I mean enormous. The use of reserves began back late in April, but it really stepped up at the start of August, which to me is a pure macro reaction. Flat beverage. You remember early August? The July payroll report was the one with its revisions that really shook up the markets because of what that represented, not just in terms of risk to the U.S. macroeconomy, also globally synchronized too, but also what it would mean for the cockroaches, even before everyone knew about them or what cockroaches actually meant. Funding market participants have been aware of the situation in private credit, the garbage lending that Gunlatt called it. They are also aware what happens to that garbage should the U.S. economy now enter the flat part of the beverage curve. So with the July payroll numbers, that possibility went from something everyone worried about in the back of their mind to holy crap, this thing could really be happening. Dollars tightened up as a result and foreign governments and reserve managers have been using their reserves exceptionally heavily ever since then. Only later in October do we really begin to see it impact in more mainstream ways like the Fed's repo facility, but you could see the tightening coming in repo rates like SOFR at basically the same timing and even a little bit before the July payroll came out. But the numbers, the amount of reserve assets that have disappeared essentially from New York been absolutely huge, staggering. As of the latest weekly update, which goes to last week, 168 billion have vanished just since the end of July. That's an enormous use of reserve assets as you can see very clearly on the charts here. So here's the thing. When it first started in August, like the ultra negative copper to gold ratio, it didn't seem to fit. It seemed to be too much. This appeared to be maybe even too extreme. This was such a huge backlash that it was in the same range as March of 2020. March of 2020. But now four months later, it doesn't seem so out of line, does it? We've got flat beverage confirmation in the macro economy, globally synchronized, got cockroaches. We've got hedge funds that are being hit with redemptions and a whole bunch more going on with private credit. So the dollar tightening that was indicated by this series and all of these negative market indications, maybe they really were what they appeared to be while everyone was distracted by a stock market that is at best a casino. The markets were telling you and now we can start to really see what it is they were trying to say. Earlier this month, UBS's CEO, a fellow by the name of Combe, he started pointing fingers at private credit, not unlike Jamie Dimon had with his cockroaches remark back in October. But Mr. Kelleher, although he was somewhat more diplomatic, he pulled no punches in his comments, but they weren't only directed at the current target, meaning shadow banks. Instead, as Bloomberg reported, the war of words between private credit and banks has stepped up a notch. Combe Kelleher, who's the chairman of the Swiss lender UBS Group, warned this week that poor insurance regulation and credit ratings arbitrage were creating systemic risks, especially in the US. Now, Mark Rowan, who's the chief executive officer of Apollo Global Management, the private capital manager that owns LifeInsure Athene, shot back Combe is just wrong. In recent weeks, there's been mutual sniping between the two sides of the debt industry about lending standards, risk management, and who made the errors in financing the failed companies, Tricolor and First Brands, the banks that underwrote the corporate loans or the private managers that put up the supply chain in inventory funding. But Kelleher trenchantly described a bigger issue at a Hong Kong event, the sheer scale of private credit that's now being funded by insurers and whether insurance regulators are competent to oversee the risks involved or insurance company managers. Credit ratings, a grading system of borrower health, play a critical role in this debate because they drive the calculations of how much capital insurers must hold for the investment risks that they take. And investors I've spoken to in recent months, the author says, worry that a lot of optimization of ratings relative to risk and yield is happening in this area right now. And there's two major issues here. One, insurance companies are always looking for ways to reach for yield. It's in their mandate. They have huge liabilities. They have requirements, internal and as well as external, to not take huge risk while they have these liabilities. So anything that Wall Street can come up with that looks safe, that looks safe and pays a fatter return, the insurance industry is going to be all over it. That's true of every cycle. Now that's not necessarily a horrible thing either. It's just a business. But that opens the door to lack of oversight and the typical bubble characteristic, greed and everything else. And all the stuff that we've been talking about with cockroaches, the entire industry's apparent inability or the unwillingness to do basic due diligence to conduct proper underwriting and oversight comes back to these requirements. And so one way to work around all that is by offloading the task of underwriting and due diligence to ratings agencies. And as we saw during the last major credit bubble in the 2000s, ratings agencies, ratings were far from reliable, to put it kindly, particularly where it came to factors like liquidity and pricing risk as much as missing all the credit matters underlying everything. Now, a recent paper from the BIS had warned that maybe too much of the global financial system, including insurance companies, had been depending upon too much questionable ratings agencies products. Things like, get this, private letter ratings. These insidious things are when private credit originators just go rating shopping, moving from agency to agency until they find one who's willing to give them the rating they want the securitization structure can be sold to investors like insurance companies. And the reason why they're called private letter ratings is that no one ever sees the shopping or the details behind the rating. So there are a lot of private credit deals and structures that have maybe stellar ratings, but let's say questionable reliability. So going back to Bloomberg here, Egan Jones Ratings has become a go-to shop for private letter grades and turned out more than 3,000 of them in 2024 with just 20 analysts doing the work according to an investigation by Bloomberg News in June. So you remember the one guy from Blue Owl who said the market was pricing those funds like they were sitting on some huge losses and he was shocked the market would do that because he didn't see anything like that as even remotely possible saying that the market is completely wrong. Now, maybe it is, but you can see why the balance of perception has shifted. Everyone went from sunny, strong, solid, therefore volume over everything and reaching for yield with no questions asked to now all of a sudden this stuff is bubbling up to the surface and becoming public. So if private credit was sitting on huge losses, this is kind of what it would look like, right? This is how that would be able to happen in the first place. So the pendulum that's now swinging all the way to the other side of systemic skepticism in the public mind, in financial markets, in money markets, that's not some big mystery, especially with the flat beverage macroeconomic background behind everything. So as I said, with bull steepening and record low copper to gold, the massive amount of reserve assets are being used by foreign official institutions. When those started to show up in the summertime, maybe they seem to be way out of line with the mainstream view. But now, as we give thanks here in 2025 and staring into the face of December in the year 2026, the mainstream view has moved decidedly in the direction of these forward looking markets. They don't seem to be so out of line and so out of touch as maybe they had before. The fact that the mainstream is moving in that direction and not the other way around is the point that I'm making in this video. Happy Thanksgiving to everybody. The latest as far as hedge fund drama specifically, that's what the Blue Owl merger that was eventually called off after a couple of days that the details became public. And that's all in the video link below. As always, thank you very much for joining me. Check out your University's Black Friday sale link in the description. Thanks to your University members and subscribers. And until next time, take care.