Note: Since this was published, the repo markets have not improved; the Fed supplied another $205 billion to the market on October 18. See James Bianco’s LinkedIn post for more at: http://bit.ly/35MM8QJ
The Federal Reserve has extended its recent interventions into the securities repurchase, or “repo” market, into November. It’s the first time that the Fed’s intervened in this market – vital to funding banks’ overnight cash needs – since 2008. This latest extension confirms that it’s more than an end-of-quarter blip, and stands among other recent troubling economic signs that could herald a wider downturn.
The Fed may need to purchase as much as $200 billion in treasuries to shore up liquidity for the longer term without needing to continue with daily interventions. This may keep a lid on rate hikes like September’s explosion to as much as 10% for the time being, but the need for concern is real, especially alongside a worsening US-China trade war, negative bond yields, and a tightening manufacturing sector.
These concerns are worsened by the simple fact that this crisis in the repo market isn’t being caused by a sudden shortage of cash among the big banks – the reserves of US banks currently sit around $1.4 trillion, dramatically above reserve requirements. A bullish outlook, alongside paid interest from the Fed in the form of IOER, has given the banks little incentive to lend into or participate in the repo market.
For some in the crypto world, these portents of a potential global recession are promising news for bitcoin. But what they actually mean for crypto markets is difficult to reliably predict. While bitcoin could potentially be seen as a safe haven for investments in the face of a new financial panic, they could also realistically stand as the first, riskiest asset on the dump list.
It’s all untested theory, but the crypto market is changing, and could potentially be on a pathway to be a more stable investment, as moves towards more reliable clearing by recent market entrants offer newfound security.
Blockchain-based credit ideas could offer solutions to the puzzling state of the current bond market, where negative yield curves reflect a lack of confidence in ‘safe’ investments. Distributed ledger asset directories have the potential to more-accurately track collateral and power emerging market lending.
Unfortunately, like with so many things in crypto markets and with distributed ledger technology in general, the potential is enormous and easy to see, but how it will play out in the face of real need remains an open question.