56.1 Treasury Selloff Submerges Repo Market Under Zero

———Part 1 Summary———

Learn why rates in the repurchase agreement market went negative. What might it mean for economic recovery, not only in the United States but globally? Learn about 2013 and 2020 when repo securities also “traded special”. Jeff Snider offers two explanations, one benign (sort of). The other? Malign.

———Episode 56 Intro———

Space, the final metaphor. Why do central bankers offer spirographic, retrograde answers? Because they operate within a Ptolemaic paradigm – a geocentric model of our monetary system in which the central bank is the hub around which all else revolves. Why is unobservable, offshore credit fundamentally important? Because like dark matter and dark energy, this shadow money represents the broad majority of material and heat that constitute our monetary universe.

Which brings your podcaster to the 21st chapter of “The Courage to Act” authored by Ben Bernanke. There, the former chairman defends the Fed’s second quantitative easing in 2010 because of an economic “false dawn”. No mere rhetorical flourish, the false dawn is a regular astral phenomenon. Each autumn and spring, the northern and southern latitudes respectively, will observe a triangular diffusion of light rising above the horizon. It seems to herald recovery from the darkness.

But Sol won’t come. Not yet at least. Light, yes. But the wrong kind. Instead of a medley of warm colors refracted by the near atmosphere, the false dawn is a sterile white, originating far beyond our Earth, in cold space. Officially known as the Zodiacal Light, we witness interplanetary dust particles reflecting sunlight.

Perhaps not surprisingly, Bernanke’s book had no further chapters on economic false dawns despite their taking on an astronomical regularity, arriving again and again and again in 2011, 2014 and 2017. Jeff Snider, part-time monetary sleuth and full-time cosmos student, recognizes the difference between reflation’s false dawn and recovery’s warm glow. In this, the 56th episode of Making Sense, we review the light coming over the horizon from negative repo rates, surging M2 money supply and rising US Treasury yields. We find it cold, fallow and gray.

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Twitter: https://twitter.com/EmilKalinowski
Art: https://davidparkins.com/

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———Ep 56.1 Topics———

00:05 What do we mean when we say a security is “trading special”?
03:38 Is there such a thing as a 10-year US Treasury security? No! It is an amalgamation of ’em.
04:56 One reason why USTs are in short supply is because speculators are shorting USTs
06:52 Where can speculators find UST to borrow?
08:24 General collateral does not require the specific security to be returned; other repo may
10:25 What is the second reason (other than shorting USTs) why a UST may trade special?
14:08 In 2013 a collateral shortage AND THEN a speculative short-selling sent repo special
16:32 Jeff Snider advised US Congress(wo?)men what questions to pose to Ben Bernanke in 2013!!
18:19 Is 2021 a repeat of 2013? Both a shortage of collateral (bad) and UST shorts (good)?
20:05 A normally functioning market could handle UST shorts, ergo we are not in a normal market

———Ep 56.1 References———

Deja Vu: Treasury Shorts Meet Treasury Shortages: https://bit.ly/3rJMnGP
Alhambra Investments Blog: https://bit.ly/2VIC2wW
RealClear Markets Essays: https://bit.ly/38tL5a7

———Who———

Jeff Snider, Head of Global Investment Research for Alhambra Investments with Emil Kalinowski, Taken by melodrama. Art by David Parkins, on an errand, sent by grocery store clerks, to collect a bill. Podcast intro/outro is “Departure Lounge” by Brendon Moeller at Epidemic Sound.