The UST GC repo rate was at or near 50 bps for the ninth consecutive trading day today, fixing at 50.5 bps. In what has become routine of late, DTCC reported on-exchange volume in UST was a paltry $37.3 billion, leaving the 20-day average of volume at just $51.4 billion – the lowest in a long time. Volume in MBS repo has picked up of late, but only slightly and in no way near enough to offset shrinking UST repo. It is possible that repo participants have simply moved back into the shadows where most funding takes place anyway (bilateral and bespoke), but the published GC rate suggests that volume overall is in fact declining.

We already know that the GC rate is far out of place compared to federal funds; the former is supposed to be less than the latter due to the increased risk of unsecured lending. The arrangement has been backward since October 15, 2014, a date that rings no alarms for economists but places prominently in common sense. Repo rates, however, are still out of alignment with even LIBOR though eurodollar lending rates have been noticeably rising.

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Overnight LIBOR was 42.044 bps yesterday, meaning that for nearly all of 2016 GC repo (as reported volume collapses) has been above the same tenor unsecured in either eurodollar or federal funds. In fact, repo rates continue above not just O/N LIBOR but up to and past the 1-month LIBOR maturity despite its recent ascent. Rather than comment on this rearrangement of basic structure(s), all we hear is “2a7”, as in money market reform that hits upcoming money market fund arrangements.

Usually 2a7 accompanies only commentary about how there is nothing at all interesting in often rapidly rising LIBOR. It is the current go-to comforting benignity that addresses only as far as mainstream curiosity is forced to go; otherwise there would be very uncomfortable collateral discussions taking place out in public where no policymaker or economist (redundant) wants them. Instead, as Barron’s wrote in early August:

Blame money market reform.


New regulation taking effect this Fall is prompting institutional investors to sell prime rate funds in favor of funds that own just short-term government bonds. That’s causing the Libor rate [London interbank offered rate] to rise when most interest rates are falling. The three-month rate hit a seven-year high at the end of last month.

And here is Blackrock’s Chief Investment Strategist for Fixed Income a few weeks later, in mid-August:

A rise in LIBOR rates is enough to rouse flashbacks to the dim days of the global financial crisis. But today’s rise in LIBOR is not a signal of credit stresses in the financial sector. It derives from another source: impending regulatory changes to U.S. money market funds (MMFs).

Why so much attention to money market reform in July/August? Because the interbank market has once again forced itself upon the reluctant orthodox mainstream to come up with an excuse as to why what so clearly appears as dysfunction cannot be. If you believe in QE as a catch-all for every financial ill, then “rousing flashbacks” to the “dim days” of 2007 and 2008 is entirely out of the question.

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As I stated quite purposefully on August 9, I remain totally unconvinced. Part of the reason is as I stated at the outset, namely these excuses are only intended to go so far and thus try to plausibly cover only what people may be talking about. US money market reform doesn’t even come close to addressing why the Bank of England can’t get financial institutions and dealers in the UK to part with their government bonds (subscription required); or why the PBOC was recently forced to let O/N SHIBOR hit 2.083% (as of today).

In plain terms, though, we don’t even need to get into all that to question money market reform. If it was such a big deal and so potentially disruptive, why are we just now hearing about it? The rules do take effect on October 14, but they were written and published in the Federal Register more than two years ago. Where were all these sudden LIBOR experts cautioning even just last year that when LIBOR rises in the summer of 2016 it will be no big deal and everyone can just ignore it? Applying post hoc justifications is as weak a presumption as it sounds.

By contrast, I was writing throughout 2014 and 2015 how each of these supposedly random non-events were instead warnings that money markets were increasingly disorderly – so much that they have had the effect of disabusing and destroying some of the “best” laid plans of the most respected central banks; including, it needs to be reiterated, the Federal Reserve who by count of their own “dots” should have been beyond 1% or 1.5% and still going by now.

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Two years and one day before Blackrock blamed 2a7, I wrote in a post titled Rocky Days Ahead that there was as much good and relevant information in the Swiss bond market and franc interest rates swaps than in all the combined intellectual capital of all the world’s central banks. It was those central bankers who at that time were increasingly more sanguine and not shy about letting it slip that established this mainstream reluctance to call a spade a spade.

That is a curious result and offers a couple potential interpretations, clouded somewhat by the odd shape and odd changes to that odd shape, not the least of which is further expectations of more “money” moving into Switzerland. That would seem to suggest exactly that idea of testing the ECB’s resolve to “do what it takes” to “save” Europe and “its” euro.


Further than that, as some doubt undoubtedly creeps back into Europe, that will extend elsewhere, including the US due to the close financial integration. But the means of that extension is not just, in my opinion, European banks or investors fearful of European consequences, but more broadly that the monetary experiment in Europe failed rather obviously, and that interpretation is not likely isolated geographically. What’s true of Europe is true for everywhere else that used and uses what are really the same blunt and inappropriate tools.

In November 2014, as funding difficulties began to translate all over the financial map:

What this all tells me is that in the middle of 2013 credit markets were idealized and enthralled that the Fed had engineered what it long sought, both a stable recovery and an exit path. The treasury curve grew steeper and interest rates rose including eurodollars. Almost immediately that ran global problems before clogging up even domestic liquidity. What looked like a stable recovery and exit path turned very quickly into an unstable economy and nothing but problems upon even mentioning exit. In short, to use the refrain once more, they don’t really know what they are doing. So the difference between 2013 and 2014 is that credit markets, including globally, now know it.

On December 2, taking cues from a realistic (rather than intentionally obtuse) interpretation of the events of October 15, I issued a series of warnings about growing “tightness” and how that was manifesting:

In terms of the brightest warning lights flashing at the moment, crude prices and the US treasury yield curve are highly synced. The inclusion of breakevens in that may seem, again, self-referential, as clearly hedging for inflation takes cues from oil, but that does not disqualify any additional informational content from the obviously different motivations of participants in each market.


There can be no doubt about the “dollar’s” role in harmonizing this bearishness. While uninitiated commentary misses the key points about the eurodollar standard, the fact of financial reality under such conditions is that global finance has “tightened” significantly via the global dollar short.

And then two days before the Swiss National Bank was forced to essentially prove the “dollar” thesis, I wrote that the money market events of early December 2014 were perhaps the “last nail” in the coffin of the recovery idea.

The inflection points of the past year and a half or so have become waypoints by which to mark the progress toward seemingly darker days ahead. In many respects, as I tried to express earlier today, this is nothing new not just in recent history but in troubling comparison to far worse fates. Those specific dates have taken on added meaning in terms of the context that has developed whether or not we have actually pieced together what actually occurred – October 15, for example, is pretty much straight-forward (and not electronic trading), whereas November 20, 2013, remains a mystery as to specific details but easily understood for the implications of that mystery.


For all the bearishness in credit and funding that has developed between those days, there is another period shaping up as an inflection in behavior. There is no specific financial occurrence at which to begin the accounting, but there is no less of an imprint upon and around December 1. The month of December saw some of the most concerning trading and financial performance yet without an easily discernable and apparent reason for it.

We have given that then seemingly non-specific “financial occurrence” a generic name – the “rising dollar” that isn’t always a dollar that rises. It is a euphemism for contracting money supply across all its various dimensions, most of which are never even imagined by economics. The absolute collapse in the yield curve that took place starting December 1, 2014, was absolutely right, heralding the final steps into the so far self-reinforcing “mystery” of global money tightness leading to global economic contraction (if only slight but steady) leading to more global money tightness and so and so on.

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I don’t recall reading regulatory exclusive views expressed during that time suggesting all of that was instead money market reform of no particular worry or importance to the overall positive bend in markets or economy; and if someone had written it, I would have. It is only in viewing LIBOR in the narrow focus of just this summer that anyone could believe in 2a7 as anything like plausible. This story is far more than the past few months, as these were all monetary warnings about what was to come not just for markets (though that did happen, twice so far) but really to the economy at a time when everyone (and I mean everyone) was convinced the world was right on the cusp of that better place.

If the credit analysts at Goldman Sachs (which seems to be the singular research note that all these various places are referring to) had written in January 2015 that though they agreed “full employment” was imminent and the economy seemed poised to undergo actual sustained growth money market reform was a huge risk that could derail all of it I would be more impressed by the current argument (though still nowhere near convinced). Instead, the media and analysts are so obviously back-testing theories to fit their preconceived notions of what “should be” rather than scientifically incorporating the holistic perspective (that would account for much, much more than LIBOR) spanning not just this “rising dollar” but all the way back to August 9, 2007, and before.

This is not to say that 2a7 reform isn’t having any effect at all; it clearly is as a good number of money funds have of late shifted out of prime activities and into governments. But it is such a relatively minor and isolated disturbance inside what is a clear (to anyone not so easily impressed and swayed by central banker credentials), long-established baseline of disorderly monetary conduct that to apply it now as a universal excuse is misleading. The question is whether or not it is and has been intentional.