Former Fed & Primary Dealer Insiders on Dollar Repo Madness

Published on
September 23rd, 2019
Duration
38 minutes

Former Fed & Primary Dealer Insiders on Dollar Repo Madness

The Interview ·
Featuring George Goncalves and Danielle DiMartino Booth

Published on: September 23rd, 2019 • Duration: 38 minutes

Danielle DiMartino Booth, chief strategist at Quill Intelligence, interviews George Goncalves of The Bond Strategist in his first appearance on Real Vision. As former insiders of the Dallas Fed and US Treasury primary dealers, Danielle and George deconstruct the US Dollar liquidity problems and help clarify the major structural issues confronting the repo markets. Filmed on September 18, 2019 in New York. Please see Danielle & George’s note here - https://www.realvision.com/fed-insiders-on-dollar-repo-madness-report.

Comments

Transcript

  • JT
    Jayne T.
    27 September 2019 @ 23:18
    Powell want to keep his job. Period. The only way to do that is to project (to Trump) a positive economic outlook. Powell is whistling past the graveyard.
  • HM
    Hamed M.
    26 September 2019 @ 07:20
    How does anybody now that a mid-cycle adjustment is a mid-cycle adjustment? What is a mid-cycle adjustment? At a minimum how do you know that you were in the middle of a cycle (regardless of what you do then) without the benefit of having completed the entire cycle and thus knowing where the cycle ended?
    • AF
      Andre F.
      27 September 2019 @ 05:15
      Jeffrey Gundlach, in a recent CNBC interview, also pointed the odd terminology of "mid cycle adjustment". He said it's not a term that anyone uses, Gundlach says Powell simply made it up.
  • PV
    Paul V.
    25 September 2019 @ 14:43
    Great interview. I'm not a bond person and I've been struggling with understanding whats going on in the funding markets. With this interview I'm now in a better position to start to figure it out. But I'll probably rewatch next week. Great work to all.
  • MF
    M F.
    25 September 2019 @ 13:57
    This was a tremendous interview. Both speakers are steeped in knowledge but managed to take a somewhat difficult yet highly topical topic and make it digestible and applicable. Both speakers stated their points clearly, without bluster or bravado; just both very solid in their areas of focus. Moreover, this topic, albeit not as sexy as easier areas to understand, is truly critical to the trajectory of fed policy, tactical moves, and systemic risk. Well done, and bring these speakers back.
  • AR
    Anik R.
    24 September 2019 @ 21:24
    I am very new to macro-econ and monetary policy so I didn't understand anything in this video. It went completely over my head. Can someone summarize the key points made here? Or guide me to some resources that can help me get on track? My background is mathematics. Cheers!
    • GG
      George G. | Contributor
      25 September 2019 @ 07:17
      Hi Anik - a portion of this video was dedicated to the current macro backdrop and how that is evolving versus other similar periods in the past and how does it compare to Fed views. IMHO, the key difference now is the shape of the curve - it’s inverted for months for both domestic and foreign investors - total return motivations aside - this influences where certain investors prefer to invest or if at all into longer-term bonds. The liquidity issues of the day are multifaceted but largely is a result of the intersection of heavy central bank stimulus vs regulation requirements vs market functioning. USD is always in high demand but it has been growing faster post 08 crisis. Fed pumped in a lot of reserves during the legacy QEs, but QE3 was the big one. A function of more cash in circulation, foreign central banks holding cash at Fed (versus buying bonds) and large US govt cash (which acts as liability on Fed’s balance-sheet) has helped to reduce electronic reserves (which help fulfill new bank liquidity Regs). All this with potential hoarding of liquidity to have larger buffers and a set of unique daily cash flow factors last week helped to spike level it costs to borrow short-term overnight money, repo. It starts to get more complicated than that once you start looking at Eurodollar market role but part of it comes back to dealers and leveraged investors who play a role in helping to underwrite the US govt debt as well as market functioning. They have had to at times pay more to borrow short but last week it led to much higher repo rates that infected the Fed Funds rate. So the NY Fed had to act to help push down rates back into their target ranges via repo operations w/street. Many argue its the tightness/reduction in reserves that led to this and thus Fed may need to do QE to add back reserves that have been slowly whittled away as per above. They want and need to stabilize funding costs as if it remains volatile investors that borrow to invest will get upside down fast. If that happens in a period of reduced overall liquidity it can result in a combination of higher rates and lower asset prices.
    • MT
      Mike T.
      25 September 2019 @ 10:30
      Anik, is it clearer now? In response to a previous post of mine on this thread, a really excellent plain english response from LYNN P. following not only this video, but this podcast https://www.macrovoices.com/podcasts-collection/macrovoices-all-stars-podcasts/704-all-stars-60-jeff-snider-deep-dive-on-the-repo-blowup from LYNN P. Especially around the 13 minute mark of the interview with Snider, where he makes an important distinction: are the primary dealer banks "stuck" with the Treasuries that they are obligated to buy and therefore are forced to fund them in the repo market (that part is likely true). Or are the banks hoarding the Treasuries (there is no requirement that the banks not sell the Treasuries they are required to buy)? And, if so, why? Snider argues that there is plenty of demand for Treasuries and at very high prices (some even say there is a 'bubble' in the Treasury market). Further, the way money markets are designed to work is the dealers buy from the Fed and sell into the marketplace of varied buyers who wish to allocate a portion of their portfolios to Treasuries. Snider notes there is tremendous demand for the 2-year Treasuries, and the dealers stand to make a profit by selling them. Therefore, dealers, by not selling, are giving up opportunity profits by holding Treasuries, which appears to make no economic sense. So, for example, why aren't banks selling Treasuries and lending in repo at higher rates? There has to be something special about Treasuries that make the dealers hoard them. What makes them 'special" is the collateral side of repo. Here is the essential point in which Snider differs from everyone else who has opined on "repo madness": the value of Treasuries (and Bunds) in the global funding market is that Treasuries are the best collateral that guarantee access to repo in a crisis. All that matters to the repo counterparty is the liquidity characteristics (not the credit characteristics) of the asset. And Treasuries are the best collateral. This is the perceived constraint that market participants were acting on last week. In the event of a liquidity crisis (recall Lehman), what matters is having access to funding, and ONLY Treasuries (and Bunds) have this liquidity characteristic. How much can it move in price while it is in the position of the counterparty? That is what make Treasuries - as collateral - special, and why there was not sufficient funding in the repo market last week. There is a problem in the repo market, but it is systemic and on the collateral side. It is not just the seasonal supply and demand that the dealer banks are familiar with and have managed in the past. On or around May 29, 2018, things changed and collateral repo was the response. It's been an episodic problem ever since, and marked the beginning of an increase in thevolatility of demand for 'safe haven' assets. At a sign of a potential crisis, the 'guys' with the best view of what's going on in the global money markets system (the people who man the trading desks at the primary dealers and are familiar with the balance sheets of their counterparties) want to hold on to Treasuries. This is the underlying constraint that is not being discussed by anyone other then Snider, at least insofar as I am aware.
    • LP
      Lynn P.
      25 September 2019 @ 19:58
      There remains (at least) one thing about which I am unclear, which is the demand for Treasuries. Danielle and George suggest low demand, with Treasuries 'stuck' (due to lack of demand) on dealer balance sheets that require funding. If I understand Snider, he suggests that is more than ample demand, as the high price/low yield of Treasuries would suggest. George cites the inverted yield curve which argues for less demand from potential buyers of Treasuries due to the low yield on longer duration. I can see the logic of both positions. I would note here that in the article co-written by Danielle and George they do refer to dealer hoarding, so they are in broad agreement with Snider (Snider goes into greater detail about this, including an excellent Eurodollar University article with T-accounts that clearly explain the position of those entities who are willing to hold negative yielding assets for their collateral value that guarantees access to liquidity if/when the next panic comes.) https://www.alhambrapartners.com/2019/08/20/eurodollar-university-diagramming-repo-reserves-and-negative-yields/
  • AD
    Anna D.
    24 September 2019 @ 20:04
    Great interview.
  • RM
    Robert M.
    24 September 2019 @ 14:52
    I have found Danielle's previous interviews easy to follow and very worthwhile. In this one she seemed agitated and had a point to prove, too eager. I got the impression that she had a real sense of urgency in trying to explain the ramifications of the Fed's intervention in the repo market and I did not really come out having a better understanding of the ramifications. I knew it was significant but needed help in understanding more. It would be helpful if Raoul or Grant interviewed her to flesh out the issues, I have no doubt that she has a significant understanding of the recent events.
    • TS
      Trevor S.
      24 September 2019 @ 20:03
      Jeff Snider and Luke Gromen have been the best resources for repo market madness.
    • DS
      David S.
      25 September 2019 @ 05:33
      Mr. Goncalves points about the Fed were often more nuanced and objective. In past interviews Ms. Booth's comments were not challenged. This allowed her more freedom to present and develop her opinions. DLS
  • JD
    JUGAKALPA D.
    24 September 2019 @ 13:26
    Two of my favorite people. Thank you Real Vision.
  • JW
    Jason W.
    24 September 2019 @ 08:37
    You’ve got a new top interviewer here!
  • tc
    t c.
    24 September 2019 @ 06:48
    It's not so easy to flip seats and Danielle did a great job of it. But I would have liked some digging into G.G. responses. Somehow it didn't get to the heart of the issue. Still wondering why the banks won't lend. Jeez I would love to get 2% on my excess cash. Are they really all tied up in Ts inventory? Are foreign banks pulling out cash? Is the carry cost to much? Danielle with Jeffrey Snider - YEAH. He really needs someone to interpret. Erik Townsend has done alot to make JS more understandable but DDB can go head to head knowledge with him. Go For it RV
    • GG
      George G. | Contributor
      24 September 2019 @ 07:23
      Thanks TC - first time for the both of us in this format - I go deeper in the note and have further details on twitter too. Only so much time to go down the rabbit hole, but that is fair.
  • DZ
    Dongbin Z.
    24 September 2019 @ 05:05
    The interviewee was interrupted many times when clarifications were not needed. Not good.
  • JS
    John S.
    24 September 2019 @ 04:40
    Lots of intellectual horse power on the stage yet answers seemed lacking insofar as why these issues matter and what knock on effects may follow. Deeper contextual explanations would have made this conversation much better imo.
    • GG
      George G. | Contributor
      24 September 2019 @ 07:20
      Hi John - thanks and take a look at the written note and charts for more context - a lot of moving parts as they say but good to know - will try to connect the dots more for you all.
  • BS
    Bill S.
    24 September 2019 @ 03:32
    Find a different sales funnel
  • BS
    Bill S.
    24 September 2019 @ 03:31
    NO - I don't want to listen at the end to a marketing/sales pitch
  • BS
    Bill S.
    24 September 2019 @ 03:17
    Greajt interview Consider a follow on:\ DiMartino- interviewer Jeff Snider /Alhambra + Goncalves
    • DB
      Dylan B.
      24 September 2019 @ 07:32
      Second that, I'd love to see Jeff Snider and DiMartino get into a deep discussion about monetary policy and the macro environment.
  • ma
    mary a.
    24 September 2019 @ 03:08
    The foreign central banks are preferring to "leave their funds with the FED rather than to buy Treasuries"....."there is a mini buyer's strike for Treasuries".... I never heard the reason for this and to me that is crucial. Did I just miss it?
    • GG
      George G. | Contributor
      24 September 2019 @ 07:15
      Thanks Mary for picking up on that. It’s all related to the shape of the curve. It was touched upon quickly in passing but it’s also explained a bit more in the attached report we did. Bottomline, in my view, with a flat to inverted curve, if you prefer liquidity (with the best counter-party in the world versus holding individual bond Cusip risk) and if you can, you put your money at the Fed. It’s zero duration and pays a higher yield than the rest of the curve given it’s upside down. Now all that is independent of total returns that longer bonds are afforded if rates keep rallying but from a pure yield, convenience, liquidity point of view it pays to park cash at the Fed (for those that can). But at times it can restrict the oxygen needed to help fund the ongoing deficits was the point.
  • DF
    Dominic F.
    24 September 2019 @ 02:36
    Awesome discussion !! A room filled with integrity :-)
  • DR
    David R.
    24 September 2019 @ 01:42
    Their note (linked in the description) from the Daily Feather was even better!
  • MK
    Monty K.
    24 September 2019 @ 01:20
    Excellent interview. As an observation, I could see the Fed ramping up to bail out (QE) the world or at the minimum, Europe. Failure to do so could have catastrophic blow back on the US economy. I don't care what anyone says, I can see some form of MMT emerging out of this mess.
  • JS
    James S.
    24 September 2019 @ 00:44
    Excellent and timely interview. Really raises the question of does the Fed really have a handle on the overnight repo market? Seems Fed appearances can tip off the market that the Fed does know something mr market does not think it knows or maybe the Fed is just clueless. yes, Snider/ Gromen/Booth have been warning about this for a year already, on MacroVoices.
  • MH
    Mark H.
    24 September 2019 @ 00:29
    Awesome conversation,Danielle certainly has a great insightful view .Great info
  • NG
    Nick G.
    23 September 2019 @ 21:48
    DiMartino Booth is the real deal. Keep having her interview these Fed people. Good stuff
  • PW
    Phil W.
    23 September 2019 @ 20:57
    Great stuff..............Welcome to RV Danielle!
    • PW
      Phil W.
      23 September 2019 @ 21:04
      I might add, thanks RV for releasing the videos in a timely maner
  • RS
    Reginald S.
    23 September 2019 @ 19:41
    Can someone on the Realvision production crew please ensure that Danielle DiMartino Booth has an appropriate ergonomic interview chair for the next interview. She could not sit back and had to sit straight up for the entire interview. The back of the chair did not give her any lumbar support and there was always six inches of space between Ms. Booth and the back of her barely functioning chair.
    • DS
      Derek S.
      2 October 2019 @ 03:36
      I think the chair was too large. She is a shorter person, you can see if she sat back that her legs would not touch the floor. But still unacceptable!
  • BM
    Beth M.
    23 September 2019 @ 19:12
    This interview was fascinating! I learned a lot! More Danielle and George please!
  • PB
    Pieter B.
    23 September 2019 @ 19:08
    Great interview! Please continue! Thank you.
  • RM
    Russell M.
    23 September 2019 @ 18:59
    I don’t know how guests are plied to switch chairs and be the interviewer, but it is a winning outcome that should be utilized in great measure.
  • RA
    Robert A.
    23 September 2019 @ 18:50
    Great timely interview and this reflects the “Curation” factor that RV is so good at. RV can move fast when a topic du jour is confusing all of us. Before other media outlets have even identified the issue, RV will have found a great Guest with the perfect interviewer, done the prep and background work for the presentation and rolled out yet another focused discussion that is, as usual, pithy, concise and informative. Vintage RV work here—Bravo.
  • ea
    edwin a.
    23 September 2019 @ 18:48
    A great piece. Great to see more of Ms. DiMartino Booth; so solid on the data and mechanics, and such a great communicator. It's also very helpful to see Mr. Goncalves' take on this issue, to get a new perspective on this issue that RV has been tackling now for months.. Wonderful content!
    • ea
      edwin a.
      23 September 2019 @ 19:52
      Also -- not sure I'm understanding this correctly -- but I imagine links in this discussion to what Jeff Snider has been talking about with the eurodollar system being out of Fed control...
  • MT
    Mike T.
    23 September 2019 @ 16:28
    I first watched this RV content, then quickly went over to here ........ https://www.macrovoices.com/podcasts-collection/macrovoices-all-stars-podcasts/704-all-stars-60-jeff-snider-deep-dive-on-the-repo-blowup .......to achieve initial understanding. I shall watch both again tomorrow
    • MT
      Mike T.
      23 September 2019 @ 18:39
      refer also @JeffSnider_AIP Twitter feed
    • LP
      Lynn P.
      23 September 2019 @ 19:41
      Especially around the 13 minute mark of the interview with Snider, where he makes an important distinction: are the primary dealer banks "stuck" with the Treasuries that they are obligated to buy and therefore are forced to fund them in the repo market (that part is likely true). Or are the banks hoarding the Treasuries (there is no requirement that the banks not sell the Treasuries they are required to buy)? And, if so, why? Snider argues that there is plenty of demand for Treasuries and at very high prices (some even say there is a 'bubble' in the Treasury market). Further, the way money markets are designed to work is the dealers buy from the Fed and sell into the marketplace of varied buyers who wish to allocate a portion of their portfolios to Treasuries. Snider notes there is tremendous demand for the 2-year Treasuries, and the dealers stand to make a profit by selling them. Therefore, dealers, by not selling, are giving up opportunity profits by holding Treasuries, which appears to make no economic sense. So, for example, why aren't banks selling Treasuries and lending in repo at higher rates? There has to be something special about Treasuries that make the dealers hoard them. What makes them 'special" is the collateral side of repo. Here is the essential point in which Snider differs from everyone else who has opined on "repo madness": the value of Treasuries (and Bunds) in the global funding market is that Treasuries are the best collateral that guarantee access to repo in a crisis. All that matters to the repo counterparty is the liquidity characteristics (not the credit characteristics) of the asset. And Treasuries are the best collateral. This is the perceived constraint that market participants were acting on last week. In the event of a liquidity crisis (recall Lehman), what matters is having access to funding, and ONLY Treasuries (and Bunds) have this liquidity characteristic. How much can it move in price while it is in the position of the counterparty? That is what make Treasuries - as collateral - special, and why there was not sufficient funding in the repo market last week. There is a problem in the repo market, but it is systemic and on the collateral side. It is not just the seasonal supply and demand that the dealer banks are familiar with and have managed in the past. On or around May 29, 2018, things changed and collateral repo was the response. It's been an episodic problem ever since, and marked the beginning of an increase in thevolatility of demand for 'safe haven' assets. At a sign of a potential crisis, the 'guys' with the best view of what's going on in the global money markets system (the people who man the trading desks at the primary dealers and are familiar with the balance sheets of their counterparties) want to hold on to Treasuries. This is the underlying constraint that is not being discussed by anyone other then Snider, at least insofar as I am aware. Great call Mike.
    • MT
      Mike T.
      23 September 2019 @ 21:22
      Lynn P. many thanks for your summary. As said previously I intend to watch the video and listen to the MacroVoives podcast once again tomorrow with the intention of collecting my thoughts, but it looks like you've done that perfectly already. Sincerely many thanks and regards. Mike
    • MT
      Mike T.
      24 September 2019 @ 11:09
      taken from Jeff Sniders, Twitter Feed Aug 19th, ....."....it's hard to grasp, ........ but UST's ( & German Bunds) for [ Primary Dealers ] are not investments, they are to you and me, but are Balance Sheet Tools and it truly doesn't matter what their return might be as they are held as inventory only because of their liquidity Characteristics] So the $64K question, why are the Primary Dealers now hoarding UST's (& Bunds) they bought at auction from the FED when they could sell them on the open market for a hansome profit? refer also here for additional bedtime reading: https://www.alhambrapartners.com/2019/08/19/collateral-reserves-what-is-behind-record-low-and-negative-yields/
  • DS
    Dusko S.
    23 September 2019 @ 16:03
    George Goncalves' thinking make sense, a bear steepener trade takes the opposite side of the long GE (EuroDollar) trade propagated on RV previously.
  • WM
    William M.
    23 September 2019 @ 16:01
    Outstanding and very timely explanation of the Repo etc. situation. Danielle is always awesome and conducted this interview beautifully... RV at its best... thank you all.
  • NL
    Nicholas L.
    23 September 2019 @ 15:14
    Very informative. Thank you! More of the same please?
  • RM
    Richard M.
    23 September 2019 @ 13:56
    Wow, great interview Danielle - you are a natural! I hope RV takes advantage and let's you do a series on the Fed/Int.Rates/Repo/etc like they have let some other outstanding minds do series on topics of their specialties (hope you're listening Raoul/Grant!!!). George really showed an in-depth knowledge on the inner workings of the Fed/Banking system and educated me quite a bit - really helpful on explaining all the crazy action going on in the Repo market recently (especially when hearing all the hare-brained explanations being expelled on the MSM). Brilliant!
  • DS
    David S.
    23 September 2019 @ 12:43
    All of these machinations are caused by the huge government deficits and ever increasing Federal debt. Fed money printing and all the Federal tax cuts lowering government revenues while increasing government spending are coming home to roost. Looking at trying to figure this mess out in isolation is important. The recognition of the big problem is necessary, however, if there is any hope. DL
    • DR
      David R.
      24 September 2019 @ 01:40
      Amen. Sadly.
  • TH
    Timo H.
    23 September 2019 @ 10:44
    The best analysis of the repo mess I've seen so far. Worth some money...