Bonds!

[gfp]

45 minutes ago, DooDiligence said:

Is this normal? Asking for a friend.

 

https://www.newyorkfed.org/markets/desk-operations/repo

 

 

 

Had a hard time getting the page to load but I think it's Fed standing repo facility you are linking to.  Basically what they came up with in 2019 to replace the "discount window" which had some kind of stigma attached to it.

 

Maybe they will bring back BTFP!  Can't get much better than that!

 

Seriously though, conditions are tightening up and a lot more MBS are being posted as collateral vs purely treasury securities.  I think big money center dealers are probably on a bit of a risk-off mood at the moment.

 

Unlike many, I don't think it is directly tied to the sub-$3 trillion of reserves being too low but I'm sure that's what the Fed will assume

[DooDiligence]

23 minutes ago, gfp said:

 

Had a hard time getting the page to load but I think it's Fed standing repo facility you are linking to.  Basically what they came up with in 2019 to replace the "discount window" which had some kind of stigma attached to it.

 

Maybe they will bring back BTFP!  Can't get much better than that!

 

Seriously though, conditions are tightening up and a lot more MBS are being posted as collateral vs purely treasury securities.  I think big money center dealers are probably on a bit of a risk-off mood at the moment.

 

Unlike many, I don't think it is directly tied to the sub-$3 trillion of reserves being too low but I'm sure that's what the Fed will assume

 

The graph depicts recent repo activity.

 

https://www.reuters.com/business/finance/banks-tap-fed-standing-repo-facility-record-numbers-amid-month-end-pressures-2025-10-31/#:~:text=Summary,seeing inflows of $51.8 billion.

[wabuffo]

Seriously though, conditions are tightening up and a lot more MBS are being posted as collateral vs purely treasury securities.

 

This is mostly window-dressing at month-ends.  It will fall off tomorrow and the rest of the week.

 

If things were tight, reverse repo wouldn't have also climbed to over $50B at month-end.  Remember this is banks posting reserves (which are supposed to be in short-supply) to get an over-the-weekend interest rate from the Fed.

 

In addition, for purely mechanical plumbing reasons, the US Treasury drew its general account balance over $1T.  This is to meet scheduled debt redemptions and spending next week.   It too should fall back to $800-$850B next week which will send reserves back to the banking sector.

 

Too much hysteria being fueled by journalists and social media who don't actually follow the monetary plumbing.

 

Bill

Edited November 2, 2025 by wabuffo

[DooDiligence]

Here's a good discussion on reduction of asset purchases. The top comment and RIP_Soulja_Slim's responses.

 

 

Reddit's got to be building one hell of an LLM on more than just this SUBject.

[Cigarbutt]

On 10/31/2025 at 6:43 PM, wabuffo said:

With the Federal Reserve buying the security, a bank balance sheet expansion occurs, cash is created as an asset and a (uninsured) demandable deposit is created.

Yes - but a Treasury security has been lost.  There is no private sector balance sheet expansion.  And the cash is/are reserves stuck at the Fed. 

There seems to be clear evidence that private sector balance sheet expansion occurs wtih QE.

1-See the balance sheet picture previously shared above, when the Fed buys Treasury securities from non-bank participants

2-Whe the Fed buys the Treasury security from a non-bank party (eg hedge fund), the transaction goes through a primary dealer (just a conduit) and there is an effect between balance sheets of the involved commercial bank (reserves) and the central bank (Treasury security) but there is ALSO an expansion of the balance sheets between the involved bank and the involved non-bank party. The hedge fund, for example, which sold the Treasury security ends up with money that can be spent. In a very likely way, the hedge fund is likely to buy ANOTHER Treasury security with the money but this is NEW money. This NEW money will only disappear when the Fed reverses easing in the other direction.

3-To provide further support, look at what happened quantitatively to deposits over time. Given one of the Wabuffo's iron laws of macroeconomics, deposits do not create loans, loans create deposits (new money formation principle). In essence new money comes from loan origination at commercial banks. However, and this is becoming more relevant, banks also create money when they buy securities in the open markets (just play around with balance sheets and this works out). Interestingly, when the Fed buys a Treasury from a non-bank party, the end result (balance sheet wise) is the same as if the commercial bank buys the security itself; it's just that the commercial bank ends up with excess reserves as an asset instead of the Tresury security itself.

Look at the following for fun (using deposits as a proxy for money growth):

For the longest time, loans and leases were the basis for money (deposits) creation. What has happened since 2007-8 (the QE era)?

Clues:

Commercial banks' deposits were created from the Fed buying Treasury securities from non-banks and from themselves, directly, buying securities (mostly Treasuries and MBS).

If you add those up (L+L, QE, banks buying securities), you end up with, essentially, a good approximation of the overall deposit (money) growth over time and the underlying components driving that growth.

-Numbers for securities in commercial banks have been adjusted for a baseline around 2007-8)

-I know this is not perfect (ie banks funding with its own equity, its own debt, others etc) but the main ingredients of new money creation are there and private balnace sheet expansion, there has been, with the coordination of central and commercial banks' involvement in markets

Edited November 3, 2025 by Cigarbutt
spelling

[wabuffo]

The hedge fund, for example, which sold the Treasury security ends up with money that can be spent.

 

I think you're confusing a US Treasury as not being a monetary asset with a deposit being a monetary asset.  There is no net-financial asset creation happening here.  Its just a transformation of one asset to another.

 

If your bank comes to you and transforms your $1000 in a time deposit (savings acct) to $1000 in a demand deposit (checking acct) - do you feel an increase in your balance sheet?  This is the transaction you've just described if you substitute Treasury security for time deposit and cash for demand deposit.

 

Bill

[Cigarbutt]

The point is that, as an individual, the operation looks like an asset swap, but overall, there is a new deposit (money) in the system and this holder of this new money can buy something else with that new money.

[wabuffo]

What counts is when a new financial asset gets created in the private sector with no offsetting financial liability. 

 

That's new money.  

 

You're excessively focusing on deposits as exclusively money and labelling Treasury securities as somehow having less "moneyness".

 

The Fed buying an asset with reserves does not create money. (swap one financial asset for another)

A bank creating a loan does not create money. (creates offsetting financial assets and liabilities)

 

Only the US Treasury net spending creates an unencumbered financial asset with no offsetting liability.  That is the only new money.

 

The charts you posted from 2010 to today also coincide with massive fiscal deficits (except for a short period of low deficits in 2015-16).  That's where all the money came from.

 

Here's an old table I created that explains the difference between the conventional view of money (basically M2) and the correct version that I point to.

 

 

Bill

Edited November 3, 2025 by wabuffo

[Cigarbutt]

On 10/31/2025 at 6:43 PM, wabuffo said:

Banks ended up with a new profit center: interest paid on reserves more than interest paid on deposits

 

In what currency does the Fed pay the interest on reserves?  It pays in the only currency it has - more reserves!  Which again are stuck at the Fed.   Doesn't help with interest paid on deposits which are paid with USDs.   
For this reason, I think there's no resistance by banks to the Fed lowering reserves.

Bill

Isn't this just semantics though?

Bank profit = change in assets-change in liabilities

When banks are paid with reserves, isn't this a profit?

When the Fed reverses the operation, won't the banks be able to sell this asset (returned Treasury) for another asset (marketable).

And the extra reserves, can't banks sell or loan those reserves to other banks for a profit?

-----

Isn't it interesting that the Fed has stopped remittances to the Treasury since 2022 because of deeply negative equity but has continued to pay IOER at relatively high rates (this did not matter as much when rates were ultra low)? So you have the Fed paying (with reserves i realize but still) relatively high rates (clearly higher than what banks pay on associated created deposits) to a very high % of bank assets. Considering historically ROAs of banks, this income stream continues to be a very significant risk-free contributor to their net interest margin and profitability.

[wabuffo]

Isn't this just semantics though?

Bank profit = change in assets-change in liabilities

 

Of course, but 14% of total US banking sector assets are tied up in reserve balances.  What's worse is that for the GSIB banks these amounts count against their Supplementary Leverage Ratios limiting their asset growth in lending operations.  You don't think Jamie Dimon can earn higher returns on JPM's loan book than what he earns from IORB in cash?

 

Bill

Edited November 3, 2025 by wabuffo

[wabuffo]

This is mostly window-dressing at month-ends.  It will fall off tomorrow and the rest of the week.

 

Yep - there it is.

 

[Cigarbutt]

2 hours ago, wabuffo said:

Isn't this just semantics though?

Bank profit = change in assets-change in liabilities

Of course...

What's worse is that for the GSIB banks these amounts count against their Supplementary Leverage Ratios limiting their asset growth in lending operations.  You don't think Jamie Dimon can earn higher returns on JPM's loan book than what he earns from IORB in cash?

Bill

Keeping in mind the recent interest in those discussions related to recent liquidity issues in the 'system', the SLR ratio indeed is acting as a constraint against lending and even against more commercial banks' balance sheet acquisition of Treasury securities!

One of the obvious 'solutions' (opinion) to the recent liquidity strains would be to simply relax or suspend the application of the SLR. However, (opinion, based on conventional money ideas), the last time they (regulators) did this (early 2020s), there was a bout of 'temporary' mainstreet inflation and there may be more to this than simple chronological correlation?

-----

Real L+L growth has been very weak for a while:

Do you think banks such as JPM have been constrained for private lending due to the SLR ratio limitations? Or is there something else ?

[DooDiligence]

7 minutes ago, Cigarbutt said:

Keeping in mind the recent interest in those discussions related to recent liquidity issues in the 'system', the SLR ratio indeed is acting as a constraint against lending and even against more commercial banks' balance sheet acquisition of Treasury securities!

One of the obvious 'solutions' (opinion) to the recent liquidity strains would be to simply relax or suspend the application of the SLR. However, (opinion, based on conventional money ideas), the last time they (regulators) did this (early 2020s), there was a bout of 'temporary' mainstreet inflation and there may be more to this than simple chronological correlation?

-----

Real L+L growth has been very weak for a while:

Do you think banks such as JPM have been constrained for private lending due to the SLR ratio limitations? Or is there something else ?

Jamie Dimon thinks so (see page 45)

 

https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/investor-relations/documents/annualreport-2020.pdf

[Cigarbutt]

5 hours ago, DooDiligence said:

Jamie Dimon thinks so (see page 45)

https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/investor-relations/documents/annualreport-2020.pdf

 

There is a love-hate relationship between banks and regulators and, given overall tendencies, there may be a certain polarization between the amazing advantages regulators provide (such as reserves-not-really interest income) and the disadvantages of a growingly more liquidity-dependent and complex plumbing system.

The annual report you mention is for the 2020 year. Since then, as far as i'm aware, Mr. Dimon has not really mentioned the following (for banks as a whole or for his own JPM):

i'm not relevant in this whole story but some say  that a billion here and a billion there and then soon you may be talkin' real money.

-----

i'm unable to conceive deep insights so let's try an analogy. Given your interest in NovoNordisk, let's go diabetic. In certain cases (ICU-type), it's possible to use an insulin drip to lower blood sugar while, at the same time, have a IV line for glucose infusion to elevate blood sugar. This way, you (think) can control the sugar blood levels. But this is quite time-consuming and necessitates close monitoring and it can get messy at times, giving the impression of the need for even more control (regulation). However, also, the obvious consequence is that the human adaptive mechanism (self-regulatory forces) does not get to effectively kick in as it is overidden by larger regulatory outside constraints.

It's ironic that recent talks and studies come up with a 65% rule of required excess reserves to clear Fedwire transactions as only a minuscule amount of excess reserves were necessary to clear transactions before the GFC?

Is this called evolution, adaptation or habituation?

Edited November 4, 2025 by Cigarbutt
spelling

[wabuffo]

It's ironic that recent talks and studies come up with a 65% rule of required excess reserves to clear Fedwire transactions as only a minuscule amount of excess reserves were necessary to clear transactions before the GFC?

 

This is because of a major policy change by the Fed after the GFC.  No more daylight overdrafts allowed + minimum liquidity requirements over and above the overdraft change.  Here's Dimon explaining it during the Q3 2019 JPM earnings call after the Sept Repo Madness Incident.

 

 

If one forces all 4000 US banks to hold reserves during volatile daily value transfers without ever going below zero, then yeah, the math will add up to a shite-ton of reserves.   But it doesn't have to be that way.  They could run the system with zero reserves if they wanted to.   Bank of Canada does.  Its just a policy decision.

 

Again - its not because banks want to hold such large quantities of reserves.  They could earn more elsewhere if they could redeploy that 14% of their asset base.

 

Bill

Edited November 4, 2025 by wabuffo

[gfp]

It was window dressing in that it peaked into month-end but why did it get so tight is the question.  Why did SOFR hit 4.22%, way above the upper end of the Fed Funds range?  Why is SOFR still way up above 4?

 

Why is there cash parked at 3.75 at the Fed when it could be recirculated in Repo at much higher rates?

 

Something got tight and messy and that usually means some kind of risk aversion somewhere in the money dealer recirculation plumbing market participants...

 

 

Never seen this guy's channel before, but he makes a decent case that the tightness is sort of related to the government shutdown causing the TGA refill to overshoot ->

https://www.youtube.com/watch?v=2r8AOkXCdAg

 

Edited November 5, 2025 by gfp

[Cigarbutt]

On 11/3/2025 at 7:58 PM, wabuffo said:

...

Again - its not because banks want to hold such large quantities of reserves.  They could earn more elsewhere if they could redeploy that 14% of their asset base.

Bill

Ok yes, at the commercial banks' level, about the reinvestment or redeployment opportunities, a lot of the "investable" funds have been channeled into dividends and buybacks (especially buybacks since GFC) and a devil's advocate may suggest that a significant part of these funds were derived from the NIM on IOER subsidy but let's not invoke devil's advocacy here and now. But this redeployment has resulted in less funds available for other aspects such as typical loans for the underlying productive and non-financialized economy. Is there such great underlying demand for typical loans then?

Anyways, from another era of buybacks, banks have not been exactly great at market timing but a recent report, inspired by regulatory work supported by the Federal Reserve, called this payout flexibility in action. It kind of misses the potentially attractive and opportunistic aspect of buybacks (buy low?) but even the GOAT was buying banks in 2007.

About the redeployment at the largest six banks who nonetheless prefer to buy back their own shares, one could argue that they could redeploy their reserves into Treasuries but they've done that, recently and in spades, but this process has met structural and more acute 'transitory' inflationary constraints...

An explanation for the evidence suggesting tepid demand for productive private loans would be some kind of crowding out idea (heresy?) so there's got to be other explanations?

[Cigarbutt]

On 11/4/2025 at 6:37 PM, gfp said:

It was window dressing in that it peaked into month-end but why did it get so tight is the question.  Why did SOFR hit 4.22%, way above the upper end of the Fed Funds range?  Why is SOFR still way up above 4?

Why is there cash parked at 3.75 at the Fed when it could be recirculated in Repo at much higher rates?

Something got tight and messy and that usually means some kind of risk aversion somewhere in the money dealer recirculation plumbing market participants...

Never seen this guy's channel before, but he makes a decent case that the tightness is sort of related to the government shutdown causing the TGA refill to overshoot ->

https://www.youtube.com/watch?v=2r8AOkXCdAg

Tightness and strain in liquidity is multi-factorial, tends to show up at end of quarters and as @wabuffo alluded earlier what's happened in the TGA account has contributed to this dynamic:

Contrary to Q2-Q3 2023 which saw a similar increase in the TGA though is the fact that during Q2-Q3 of 2023, both the Fed (did not really start tightening then) and what happened in the reverse repo window (decreasing levels, so a net supply of reserves to the system) helped to mitigate what happened to reserves in the system despite a growing TGA. Recently both the Fed (tightening mode, removing reserves from the system) and the reverse repo window (almost empty) have not mitigated the effect on reserves in the system caused by a growing TGA.

Whatever the reason(s), there seems to be a growing pattern of reduced liquidity which may be a "simple" plumbing issue but there may more to it?

Reserves to GDP can be interesting but a more relevant measure may be reserves to the pool of issued and circulating Treasuries:

Somehow, despite banks holding huge levels of reserves and Treasuries, this does not seem sufficient to help primary dealers to deal with a persitently large supply of Treasuries. It's always possible that banks are seeing undrawn facilities moving from off-balance sheet to on-balance sheet as a result of strain unrelated to plumbing but that remains to be validated.

Anyways, the Fed forecasts that easing and a change of composition is in the air:

Moving from ample to ampler to amplest?

Edited November 6, 2025 by Cigarbutt
spelling

[wabuffo]

My theory is that there are no severe plumbing issues...yet.   The Fed is doing the right thing by ending their balance sheet reduction because reserves have fallen below $3T.  That's a rule-of-thumb number because no one truly knows what level of total system reserves are required.  In addition, the level required can fluctuate, perhaps significantly, from one day to the next.

 

My own guess is that the smaller banks are the first ones to feel a shortage of reserves. The large GSIB banks tend to be receivers of reserves while the non-GSIB banks are not.  Looking at recent history, it seems like any time cash assets (99% of which are reserve balances) of the US small banking sector (ie, the non-top-20 US banks) fall below 6% of total assets it seems to be another red-line.  In 2019, it led to the repo madness of Sept and in Q1, 2023 it led to the failure of SVB among others. 

 

But as we can see, the US small banking sector seems to be well above that danger zone right now.

 

FWIW,

Bill

 

[tede02]

Somewhat eyebrow raising that rates are up today given the broad equity market decline. 

Edited November 13, 2025 by tede02

[Red Lion]

2 hours ago, tede02 said:

Somewhat eyebrow raising that rates are up today given the broad equity market decline. 

 

It seems like the timing on conclusion of the government shutdown might play into this. Rates up because of anticipated treasury auctions and equity markets giving up some of the last few days' gains? 

[John Hjorth]

41 minutes ago, Red Lion said:

It seems like the timing on conclusion of the government shutdown might play into this. Rates up because of anticipated treasury auctions and equity markets giving up some of the last few days' gains? 

 

Noice. Not worth your time, nor your attention.

[Gamecock-YT]

https://www.ft.com/content/395f92e2-85f2-45f7-b140-5ee9ac689bc3

 

New York Fed convened meeting with Wall Street firms over key lending facility

 

Impromptu talks come amid worries about strains in money markets

 

Quote

New York Federal Reserve president John Williams convened a meeting with Wall Street dealers this week over a key short-term lending facility, underscoring officials’ concerns about strains in US money markets. 

 

The hastily arranged meeting, which has not been previously reported, took place on the sidelines of the Fed’s annual Treasury market conference on Wednesday, according to three people familiar with the matter.

 

It comes at a time when banks, investors and officials are concerned about signs of stress in an arcane, but vital corner of the US financial system.

 

Williams solicited feedback from primary dealers, mostly banks that underwrite the government's debt, on the use of the Fed’s standing repo facility, which central bank officials describe as a crucial pressure relief valve to help them keep short-term borrowing costs within their target range.

 

 

[TwoCitiesCapital]

On 11/13/2025 at 2:26 PM, tede02 said:

Somewhat eyebrow raising that rates are up today given the broad equity market decline. 

 

Anyone able to do the math on what a Japanese investor hedging USD/yen can expect to make ona 10-year treasury? 

 

I have a bunch the move in Japanese rates has made US bonds quite a bit less attractive to the #1 owner of treasuries, but I don't have ability to check currency forward prices. 

[tede02]

Polymarket currently says there's a 73% chance the Supreme Court rules against the Trump tariffs. If that is the outcome, do you think the bond market reacts with rising rates under the assumption the deficit worsens materially with the lost revenue? That seems like a real possibility. Then again, I wouldn't be totally surprised if the market kind of shrugs either. Been on my mind.