Cracks emerging in money markets?

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Kbg
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Re: Cracks emerging in money markets?

Post by Kbg » Fri Sep 20, 2019 10:35 am

Tortoise wrote:
Fri Sep 20, 2019 12:21 am
ochotona wrote:
Thu Sep 19, 2019 7:51 pm
How can this hurt Joe Average investors? I don't go around all day thinking about the repo market. Might MM funds "bust the buck"?
Since the repo market is apparently the "plumbing" of the banking world, it's not very sexy and hardly anybody (including us) pays much attention to it.

I really don't know enough about the repo market to know what would have happened if the Fed hadn't stepped in. All I know is that the Fed has injected $203 billion in the past three days, which is 48% of the size of the 2008 TARP program ($426 billion). And it may continue.

And yet this story is still just a blip in the headlines. Interesting.
Source?
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Re: Cracks emerging in money markets?

Post by ochotona » Fri Sep 20, 2019 11:37 am

jhogue wrote:
Fri Sep 20, 2019 9:58 am
MangoMan wrote:
Fri Sep 20, 2019 7:37 am
Fidelity MM (SPRXX) which generally yields 0.25% or so more than their Treasury MM (FZFXX) is now paying 0.1% less.

I wonder if there is more to be concerned about than we think?
Don't buy repos. Don't buy money market funds "juiced" with repos. Don't be sorry. Buy Treasurys.
I think that's a really good takeaway message. A Money Market Fund is delicious, like a sausage is delicious... there's all kinds of %*&# which got stuffed into the casing. I am still sore about the failure of Schwab YieldPlus Bond Fund during the financial crisis, it was marketed as being a safe cash-like alternative. I did lose some money, but we settled.

US News and World Report, 12/30/2009 - Schwab YieldPlus. The theory behind ultrashort bond funds is astonishingly simple: Given the short durations of their holdings—six months is the average maturity—the funds should not lose much value even in tough times. Schwab, however, managed to pull off the seemingly impossible when YieldPlus lost an astounding 35.4 percent in 2008. The average ultrashort fund, meanwhile, lost just 7.9 percent that year. Unlike many of its peers, YieldPlus had heavy exposure to risky mortgage-backed securities that imploded during the downturn. "Schwab YieldPlus is one of the all-time great fund debacles," says Kinnel. "It was an ultrashort bond fund that they were pushing as an alternative to a money market fund. ... People expected that if it was going to lose any money, it was going to lose half of 1 percent or something."
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Re: Cracks emerging in money markets?

Post by Tortoise » Fri Sep 20, 2019 12:04 pm

Kbg wrote:
Fri Sep 20, 2019 10:35 am
Tortoise wrote:
Fri Sep 20, 2019 12:21 am
I really don't know enough about the repo market to know what would have happened if the Fed hadn't stepped in. All I know is that the Fed has injected $203 billion in the past three days, which is 48% of the size of the 2008 TARP program ($426 billion). And it may continue.
Source?
Source for the Fed's injected $203 billion (and still going): https://markets.businessinsider.com/new ... 1028537926
"The central bank has injected a total of $203 billion into markets this week — $75 billion on both Wednesday and Thursday, and $53 billion on Tuesday."

Source for TARP's $426 billion: https://en.wikipedia.org/wiki/Troubled_ ... ef_Program
"TARP recovered funds totalling $441.7 billion from $426.4 billion invested..."
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Re: Cracks emerging in money markets?

Post by Tortoise » Fri Sep 20, 2019 12:14 pm

Wow, I just checked the fund description for Vanguard's Federal MM fund (VMFXX), and currently 20% of its holdings are repos! :o

I have a big chunk of cash invested in VMFXX out of convenience since it's my settlement fund and Vanguard doesn't allow using their Treasury MM fund (VUSXX) as a settlement fund. (Didn't want one extra step when I want to access cash from Vanguard.)

The current MM repo market turbulence has me worried, so I think I'll be transferring most of my cash out of the settlement fund to get the repo stink off of it.
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jhogue
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Re: Cracks emerging in money markets?

Post by jhogue » Fri Sep 20, 2019 12:21 pm

Thanks for the report on Schwab YieldPlus. The analogy to sausage making is apt.

I owned Strong Ultra Short Bond Fund in the 1990s, with the usual dumb desire to chase yield. After I learned that the fund manager went to jail for securities fraud, I decided to get out. In addition to the obvious headaches, I also had to pay a CPA to help me figure out the capital gains and losses.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Cracks emerging in money markets?

Post by jhogue » Fri Sep 20, 2019 12:53 pm

I owned it directly through the fund company, back in the old days and before brokerage accounts became fund supermarkets.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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jhogue
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Re: Cracks emerging in money markets?

Post by jhogue » Fri Sep 20, 2019 1:12 pm

jhogue wrote:
Fri Sep 20, 2019 12:53 pm
I owned it directly through the fund company, back in the old days and before brokerage accounts became fund supermarkets.

Sorry, I was a little fuzzy (or slightly senile?) on the details. The company went defunct in 2004 after paying $80 million in restitution to their investors. The founder and CEO, Richard Strong, avoided jail time by paying a personal $60 million fine, the firm admitted wrongdoing, and Mr. Strong was banned from the securities industry for life.

The proud new owners of the firm were none other than the TBTF banksters at Wells Fargo, also much noted by Senator Elizabeth Warren and the members of the Senate Finance Committee for the unusual quality of their care and concern for their customers. How is that for the opposite of a warm fuzzy from the people who are looking after the American people's money?

Here is the citation:
https://en.wikipedia.org/wiki/Strong_Capital_Management
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Cracks emerging in money markets?

Post by dualstow » Fri Sep 20, 2019 1:29 pm

Tortoise wrote:
Fri Sep 20, 2019 12:14 pm
...Vanguard's Federal MM fund (VMFXX), and currently 20% of its holdings are repos! :o

I have a big chunk of cash invested in VMFXX out of convenience since it's my settlement fund and Vanguard doesn't allow using their Treasury MM fund (VUSXX) as a settlement fund. (Didn't want one extra step when I want to access cash from Vanguard.)
...
I know what you mean, but it's just an extra day. I have almost everything in treasury MM and I admit have missed an auction or two because of the extra step.
Going the other way, if I truly need to transfer from another MM to treasury, I think it's too late.
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Re: Cracks emerging in money markets?

Post by Tortoise » Fri Sep 20, 2019 1:36 pm

dualstow wrote:
Fri Sep 20, 2019 1:29 pm
Going the other way, if I truly need to transfer from another MM to treasury, I think it's too late.
Why is it too late?
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Re: Cracks emerging in money markets?

Post by dualstow » Fri Sep 20, 2019 2:01 pm

It's not too late now. I mean, I already have just about everything in treasury. If it were in prime or federal and I needed -- not wanted, but needed -- to move it to the treasury MM, it would mean something's wrong, e.g. breaking the buck.
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ochotona
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Re: Cracks emerging in money markets?

Post by ochotona » Fri Sep 20, 2019 8:50 pm

FYI, the Schwab US Treasury cash fund is SNSXX, I'm discontinuing the use of the one loaded with repo agreements which is SWVXX.
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Re: Cracks emerging in money markets?

Post by ochotona » Sun Sep 22, 2019 7:02 am

Doug Noland weekly commentary:

"With the collapse of Lehman setting off the “worst financial crisis since the Great Depression”, instability in the multi-trillion repurchase agreement marketplace generates intense interest. This crucial market for funding levered securities holdings is critical to the financial system’s “plumbing.” It is a market in perceived “money” – highly liquid and virtually risk free-instruments. If risk suddenly becomes an issue for this shadowy network, the cost and availability of Credit for highly leveraged players is suddenly in question. And any de-risking/deleveraging at the nucleus of the global financial system would pose a clear and present danger of sparking “risk off” throughout Credit markets and financial markets more generally."
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sophie
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Re: Cracks emerging in money markets?

Post by sophie » Sun Sep 22, 2019 8:42 am

77% repos? That's gone up since I last checked (was about 60%). Crazy.

I only wish FDLXX could be used as a sweep account. It's not that hard to keep shifting cash into it though. With the smartphone app I can do it while walking to work, or while stuck in boring meetings. I also have 3 sets of T bills on autoroll, and it looks like you can add to those positions anytime with the "buy" button. Pugchief have you tried that?
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Re: Cracks emerging in money markets?

Post by mathjak107 » Sun Sep 22, 2019 9:08 am

i use fzfxx as a sweep account
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Re: Cracks emerging in money markets?

Post by sophie » Sun Sep 22, 2019 10:30 am

MangoMan wrote:
Sun Sep 22, 2019 8:48 am
sophie wrote:
Sun Sep 22, 2019 8:42 am
77% repos? That's gone up since I last checked (was about 60%). Crazy.

I only wish FDLXX could be used as a sweep account. It's not that hard to keep shifting cash into it though. With the smartphone app I can do it while walking to work, or while stuck in boring meetings. I also have 3 sets of T bills on autoroll, and it looks like you can add to those positions anytime with the "buy" button. Pugchief have you tried that?
Tried T-bills/autoroll? Yes, but I prefer the liquidity of a MM fund.

I didn't know about this whole repo thing until this thread, but I have held cash in other MM funds at Fidelity, and they do automatically pull funds if necessary to cover debits that can't be paid from the sweep fund, so I will be keeping most of my cash there in FDLXX going forward.
That's what I do now, except I have the FDLXX fund in a separate brokerage account and use the cash account only for ATM withdrawals. I put all the credit card auto-debits on the brokerage after an episode this past April where Fidelity's auto-transfer software failed, and a bunch of people got stuck with late fees from their credit cards. I went with the separate brokerage because you can't set up auto transfers into a money market fund in the cash account, and its sweep pays essentially no interest.
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Re: Cracks emerging in money markets?

Post by mathjak107 » Sun Sep 22, 2019 2:24 pm

Nope..not concerned at all..repurchase agreements are standard fed action whether a fund takes part or not
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Re: Cracks emerging in money markets?

Post by jhogue » Mon Sep 23, 2019 11:55 am

mathjak107 wrote:
Sun Sep 22, 2019 2:24 pm
Nope..not concerned at all..repurchase agreements are standard fed action whether a fund takes part or not
I think a lot of investors would have described buying and selling in the large secondary market in collaterized mortgage obligations-- the sort held by Bear Stearns prior to 2008 -- as a standard action for all the TBTF investment banks on Wall Street.
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A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Cracks emerging in money markets?

Post by Tortoise » Mon Sep 23, 2019 1:33 pm

Exactly. All the articles I've read state that the Fed's current intervention in the repo market is not typical and hasn't happened since 2008. That seems like cause for at least a little bit of concern and scrutiny.
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Re: Cracks emerging in money markets?

Post by Kbg » Mon Sep 23, 2019 3:35 pm

https://www.pragcap.com/three-things-i- ... o-madness/

Good article.

PS: if you have a brokerage that you can see futures quotes with and monitor stocks, T-bonds, currencies, gold and large industrial commodities it’s pretty easy to see if something is up. I haven’t seen anything to suggest a problem.
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Re: Cracks emerging in money markets?

Post by Tortoise » Mon Sep 23, 2019 5:29 pm

I still don’t quite understand. Has the Fed been injecting billions of dollars into the repo market each day (e.g., giving it to the banks like “free money”), or has it simply been lending that money to the banks at below-market interest rates?

If the repo lending rates spiked this past week because the banks lack sufficient reserves, then doesn’t that mean the reserve requirements are doing their job, i.e., maybe the banks should dial back their lending a bit to correspond to the reserves they actually have?
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Re: Cracks emerging in money markets?

Post by Kbg » Mon Sep 23, 2019 11:30 pm

Its way complex...but the bottom line is it isn’t the liquidity being injected but the spread that matters. Wide spread basically means trust is breaking down.
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Re: Cracks emerging in money markets?

Post by boglerdude » Tue Sep 24, 2019 1:43 am

https://fred.stlouisfed.org/graph/?g=mc6A

Looks like a lot of e-cash sitting around compared to before 08. Thats still not enough liquidity?
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Re: Cracks emerging in money markets?

Post by shekels » Tue Sep 24, 2019 8:23 am

boglerdude wrote:
Tue Sep 24, 2019 1:43 am
https://fred.stlouisfed.org/graph/?g=mc6A

Looks like a lot of e-cash sitting around compared to before 08. Thats still not enough liquidity?
Exactly Kbg
"Wide spread basically means trust is breaking down."


"The increased role of non-bank institutions in providing credit means that an increasing proportion of international finance comes from unregulated sources. Effectively, this means that these institutions, including money market funds, investments banks, etc., have unwittingly assumed even bigger risks in their lending practices than commercial banks. This also means that when the downturn comes, the share of non-performing and/or defaulted loans will grow higher than before."

I can hear them asking ..What's in your Wallet I mean Portfolio/Collateral?
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Re: Cracks emerging in money markets?

Post by jhogue » Tue Sep 24, 2019 8:37 am

Kbg wrote:
Mon Sep 23, 2019 11:30 pm
Its way complex...but the bottom line is it isn’t the liquidity being injected but the spread that matters. Wide spread basically means trust is breaking down.
+1

For even more detail and analysis, see "Securitized Banking and the Run on the Repo," by Gary Borton and Andrew Metrick, a National Bureau of Economic Research working paper available on-line:
https://www.nber.org/papers/w15223

For me, the bottom line is that Uncle Harry's wisdom still prevails. Own each asset in the purest form possible, with the fewest pieces of paper between you and your money. Avoid the repo market. Buy Treasurys.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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ochotona
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Re: Cracks emerging in money markets?

Post by ochotona » Tue Sep 24, 2019 6:57 pm

The Fed said they will inject liquidity until October 10-ish. So what happens after then???
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