Category Archives: Bonds

The Student Loan Bubble – Gambling With Your Future

(SchiffGold) Have you heard? The Democrats are going to fix the student loan mess! They’ve brought up the issue in almost every  Democratic Party presidential debate. All we need is a good government program and we can easily solve this $1.64 trillion problem.

Never mind that government programs caused the problem in the first place.

The student loan bubble continues to inflate. Student loan balances jumped by $32.9 billion in the third quarter this year, pushing total outstanding student loan debt to a new record. Student loan balances have grown by 5.1% year-on-year.

Over the last decade, student loan debt has grown by 120%.  Student loan balances now equal to 7.6% of GDP. That’s up from 5.1% in 2009. This despite the fact that college enrollment dropped by 7% between 2010 and 2017, with enrollment projected to remain flat.

In a nutshell, we have fewer students borrowing more money to finance their educations.

Before the government got involved, college wasn’t all that expensive. It was government policy that made it unaffordable. And not only did it manage to dramatically drive up the cost of a college education, but it also succeeded in destroying the value of that degree. Peter Schiff summed it up perfectly:

Before the government tried to solve this ‘problem,’ it really didn’t exist.”

Peter isn’t just spouting rhetoric. Actual studies have shown the influx of government-backed student loan money into the university system is directly linked to the surging cost of a college education.

Millions of Americans carrying this massive debt burden is a big enough problem in-and-of-itself. But it becomes an even more significant issue when you realize the American taxpayer is on the hook for most of this debt. Education Secretary Betsy Devos admitted that the spiraling level of student debt has “very real implications for our economy and our future.”

The student loan program is not only burying students in debt, it is also burying taxpayers and it’s stealing from future generations.”

This is yet another bubble created by government. Despite the campaign rhetoric coming out of the Democratic Party presidential primary debates, it seems highly unlikely Congress will do what is necessary to address the growing student loan bubble. And the Democrats’ solution seems to be to simply erase the debt – as if you can just make more than $1 trillion vanish without serious implications.

Like all bubbles, this one will eventually pop.

The bottom line is that the student debt bubble will ultimately impact US markets and average Americans.

Source: ZeroHedge

Fed Gives Up On Inflation, Welcome To The United States Of Japan

On Wednesday, the Fed cut rates for the third time this year, which was widely expected by the market.

What was not expected was the following statement.

I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.
– Jerome Powell 10/30/2019

The statement did not receive a lot of notoriety from the press, but this was the single most important statement from Federal Reserve Chairman Jerome Powell so far. In fact, we cannot remember a time in the last 30 years when a Fed Chairman has so clearly articulated such a strong desire for more inflation.

Why do we say that? Let’s dissect the bolded words in the quote for further clarification.

  • “really significant”– Powell is not only saying that they will allow a significant move up in inflation but going one better by adding the word significant.
  • “persistent”– Unlike the prior few Fed Chairman who claimed to be vigilant towards inflation, Powell is clearly telling us that he will not react to inflation that is not only well beyond a “really significant” leap from current levels, but a rate that lasts for a period of time.
  • “even consider”– If inflation is not only a really significant increase from current levels and stays at such levels for a while, they will only consider raising rates to fight inflation.

We are stunned by the choice of words Powell used to describe the Fed’s view on inflation. We are even more shocked that the markets or media are not making more of it.

Maybe, they are failing to focus on the three bolded sections. In fact, what they probably think they heard was: I think we would need to see a move up in inflation before we consider raising rates to address inflation concernsSuch a statement would have been more in line with traditional “Fed-speak.”

There is an other far more insidious message in Chairman Powell’s statement which should not be dismissed.

The Fed just acknowledged they are caught in a “liquidity trap.”

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Global Debt & Liquidity Crisis Update: Fed Injects $134BN In Liquidity, Term Repo Oversubscribed Amid Month-End Liquidity Panic

‘The volume of billions being lent into existence from nothing by the Fed to bail banks out will go parabolic. It must, otherwise credit will freeze, asset prices will fall, forced bank depositor bail-ins will ensue’

With stocks threatening to close in the red, late on Wednesday the Fed sparked a furious last hour rally…

… when in a statement published at 1515ET, precisely when the S&P ramp started, the New York Fed confirmed it would dramatically increase both its overnight and term liquidity provisions beginning tomorrow through November 14th.

The Desk has released an update to the schedule of repurchase agreement (repo) operations for the current monthly period.  Consistent with the most recent FOMC directive, to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation…

As we noted yesterday, that was a massive 60% increase in the overnight repo liquidity availability (from $75 billion to $120 billion) and a 28% jump in the term repo provision (from $35 billion to $45 billion).

“It’s just more evidence the Fed will not back off as year-end gets closer,” said Wells Fargo’s rates strategist, Mike Schumacher. “The Fed wants to take out more insurance. You had repo pick up last week. That might not have gone over too well.”

And now we know that there was good reason for that, because according to the latest, just concluded Term Repo operation, a whopping $62.15BN in securities were submitted to the Fed’s 14-day operation, ($47.55BN in TSYs, $14.6BN in MBS), resulting in a 1.38x oversubscribed term operation, the second consecutive oversubscription following Tuesday’s Term Repo, when $52.2BN in securities were submitted into the Fed’s then-$35BN operation.

This was the highest uptake of the Fed’s term repo operation since Sept 26.

But wait there’s more, because while the upsized term-repo saw the biggest (oversubscribed) uptake in one month, demand for the Fed’s overnight repo also soared, with dealers submitting 89.2BN in securities for the newly upsized, $120BN operation.

In total, between the $45BN term repo and the $89.2BN overnight repo, the Fed just injected a whopping $134.2BN in liquidity just to make sure the US banking system is stable. That, as the Fed’s balance sheet soared by $200BN in the past month rising to just shy of $4 trillion.

Meanwhile, funding tensions weren’t evident only in repo, but also in the Fed’s T-Bill POMO, where as we noted yesterday, demand for liquidity has also been increasing with every subsequent operation, peaking with yesterday’s operation.

Needless to say, if the funding shortage was getting better, none of this would be happening; instead it appears that with every passing day the liquidity shortage is getting worse, even as the Fed’s balance sheet is surging.

The only possible explanation, is someone really needed to lock in cash for month end (the maturity of the op is on Nov 7) which is when a “No Deal” Brexit may go live, and as a result one or more banks are bracing for the worst. The question, as before,  remains why: just what is the source of this unprecedented spike in liquidity needs in a system which already has $1.5 trillion in excess reserves? And while we await the answer, expect stocks to close pleasantly in the green as dealers transform their newly granted liquidity into bets on risk assets.

‘The powers that shouldn’t be would rather us experience a mad max world while they hide in luxury bunkers, than allow us a treasury issued gold backed currency, absent a central bank once again’

Source: ZeroHedge

Global Debt & Liquidity Crisis Update: Repo Locking Up Again As Overnight Fed Operation Oversubscribed, Repo Rate Jumps

‘The Fed is an outpost of a foreign power that controls our economy, most of our politics and our financial future. It’s an instrument of the Rothschild global cabal. It always has been since 1913’

First it was supposed to be just a mid-month tax payment issue coupled with an accelerated cash rebuild by the US Treasury. Then, it was supposed to be just quarter-end pressure. Then, once the Fed rolled out QE4 while keeping both its overnight and term repo operations, the mid-September repo rate fireworks which sent the overnight G/C repo rate as high as 10% was supposed to go away for good as Powell admitted the level of reserves was too low and the Fed launched a $60BN/month Bill POMO to boost the Fed’s balance sheet.

Bottom line: the ongoing repo market pressure – which indicated that one or more banks were severely liquidity constrained – was supposed to be a non-event.

Alas, as of this morning when the Fed’s latest repo operation was once again oversubscribed, it appears that the repo turmoil is not only not going away, but is in fact (to paraphrase Joe Biden) getting worse, because even with both term and overnight repos in play and with the market now expecting the Fed to start injecting copious liquidity tomorrow with the first Bill POMO, banks are still cash starved.

To wit: in its latest overnight operation, the Fed indicated that $80.35BN in collateral ($74.7BN in TSYs, $5.65BN in MBS) had been submitted into an operation that maxed out at $75BN, with a weighted average rate on both TSY and MBS rising to 1.823% and 1.828% respectively.

While it was clear that the repo market was tightening in the past week, with each incremental overnight repo operation rising, today was the first oversubscribed repo operation since September 25, and follows yesterday’s $67.6BN repo and $20.1BN term repo.

But the clearest sign that the repo market is freezing up again came from the overnight general collateral rate itself, which after posting in the 1.80%-1.90% range for much of the past two weeks, spiked as high as 2.275% overnight and was last seen at 2.15%, well above the fed funds upper range…

‘The powers that be would rather us experience a mad max world while they hide in luxury bunkers, than allow a treasury issued gold backed currency, absent a central bank once again’

Source: ZeroHedge

Fed Announces QE4 One Day After BIS Warns QE Has Broken The Market

Following Fed Chair Powell’s surprising announcement today that the Fed was resuming Permanent Open Market Operations after a 5 year hiatus, just as we said last month that it would (see “The Fed Will Restart QE In November: This Is How It Will Do It“)…

… there was a brief debate whether the Fed’s soon to be permanent expansion in its balance sheet is QE or not QE. The answer to this semantic debate simple: Powell defined Quantitative Tightening as removing reserves from the system. Thus, by that simple definition, adding reserves to the system on a permanent basis via permanent open market operations, i.e., bond purchases, is Quantitative Easing. Incidentally, the repo market fireworks were just a smokescreen: the real reason why the Fed is resuming QE is far simpler: the US has facing an avalanche of debt issuance and with China and Japan barely able to keep up, someone has to buy this debt. That someone: the Fed.

And just to shut up anyone who still wants to call the upcoming $400BN expansion in the Fed’s balance sheet, as represented in the following chart by Goldman…

… QE-Lite, here is JPMorgan comparing what is coming with what has been: at a $21BN in monthly 10Yr equivalent TSY purchases, the “upcoming” operation is the same size as QE1.

Yet semantic bullshit aside, what is most infuriating about Powell’s “shocking” announcement (which we previewed a few weeks ago) is that it took place just one day after the central banks’ central bank, the Bank of International Settlements, finally caught up with what we first said in 2009 – for economists being only 10 years behind the curve is actually not terrible – and wrote that “the unprecedented growth in central banks’ balance sheets since the financial crisis has had a negative impact on the way in which financial markets function.”

Ignoring the fact that central bank policies are responsible for such phenomena as Brexit and Trump, as it is the flawed monetary policy of the past decade that made the rich richer beyond their wildest dreams by expanding the biggest asset bubble in history, while destroying the middle class…

… it is disgusting that even as the Fed’s own supervisor admits that its balance sheet expanding policies have broken the market – something this “tinfoil” conspiracy blog has been saying since 2008 – the Fed is doing even more of the same, ensuring that the market will be more broken than ever!

So what was this startling epiphany? According to the BIS, while the immediate impact of this massive balance sheet expansion had eased the severe market strains created by the 2008 financial crisis, there had been several negative side-effects. These included a scarcity of bonds available for investors to purchase, squeezed liquidity in some markets, higher levels of bank reserves and fewer market operators actively trading in some areas.

In short: last month’s repo crisis is a direct consequence of central banks’ own actions. as Scott Skyrm explained earlier.

“Lower trading volumes and price volatility, compressed credit spreads and flatter term structures may reduce the attractiveness of investing and dealing in bond markets,” the BIS said in the Monday report. “Some players may leave the market altogether, resulting in a more concentrated and homogenous set of investors and fewer dealers.”

This “could result in market malfunctioning when large central bank balance sheets are eventually unwound”, the BIS warned, adding that “it could make it more difficult for reserves to be redistributed effectively between market participants.” Of course, the BIS was clearly joking because even five-year olds know balance sheets will never be unwound.

Additionally, the BIS went on to point out that negative impacts have been more prevalent when central banks hold a larger share of outstanding assets, as the FT reportedmajor central banks’ holdings of domestic sovereign bonds range from 20% of outstanding paper at the US Fed to over 40% in Japan.

But the BIS said these side-effects had so far only rarely affected financial conditions in such a way as to impede central banks’ monetary policymaking, though it added that the full consequences were unlikely to become clear until major central banks started to shrink their balance sheets.

Worse, the BIS noted that regulations demanding liquidity at large banks might discourage the banks from offering to lend out their reserves — a source of same-day liquidity — into overnight markets. This is similar to what the large banks themselves have said in the last month. But the BIS also noted that since the financial crisis, risk management practices might have changed within the banks themselves.

Sadly, the Fed – which is fully aware of all of this – decided to ignore everything the BIS warned about, and by launching more POMO/QE/”don’t call it QE”, just ensured that the next financial crisis will be the last one.

“So looks like the banks are being re-capitalized, (bailed out) and lower rates are coming, zero or negative.. well.. now the banks can borrow cash for zero, or less directly from the Fed., then shell out loans and credit cards at exorbitant rates to We The People… oh… you are not supposed to know this… (don’t share)…”

Source: ZeroHedge

The Repo Market Incident May Be The Tip Of The Iceberg

(Daniel Lacalle) The Federal Reserve has injected $278 billion into the securities repurchase market for the first time. Numerous justifications have been provided to explain why this has happened and, more importantly, why it lasted for various days. The first explanation was quite simplistic: an unexpected tax payment. This made no sense. If there is ample liquidity and investors are happy to take financing positions at negative rates all over the world, the abrupt rise in repo rates would simply vanish in a few hours.

Let us start with definitions. The repo market is where borrowers seeking cash offer lenders collateral in the form of safe securities.  Repo rates are the interest rate paid to borrow cash in exchange for Treasuries for 24 hours.

Sudden bursts in the repo lending market are not unusual. What is unusual is that it takes days to normalize and even more unusual to see that the Federal Reserve needs to inject hundreds of billions in a few days to offset the unstoppable rise in short-term rates.

Because liquidity is ample, thirst for yield is enormous and financial players are financially more solvent than years ago, right? Wrong.

What the Repo Market Crisis shows us is that liquidity is substantially lower than what the Federal Reserve believes, that fear of contagion and rising risk are evident in the weakest link of the financial repression machine (the overnight market) and, more importantly, that liquidity providers probably have significantly more leverage than many expected.

In summary, the ongoing -and likely to return- burst in the repo market is telling us that risk and debt accumulation are much higher than estimated. Central banks believed they could create a Tsunami of liquidity and manage the waves. However, like those children’s toys where you press one block and another one rises, the repo market is showing us a symptom of debt saturation and massive risk accumulation.

When did hedge funds and other liquidity providers stop accepting Treasuries for short-term operations? It is easy money! You get a  safe asset, provide cash to borrowers, and take a few points above and beyond the market rate. Easy money.  Are we not living in a  world of thirst for yield and massive liquidity willing to lend at almost any rate?

Well, it would be easy money… Unless all the chain in the exchange process is manipulated and rates too low for those operators to accept even more risk.

In essence, what the repo issue is telling us is that the Fed cannot make magic. The central planners believed the Fed could create just the right inflation, manage the curve while remaining behind it, provide enough liquidity but not too much while nudging investors to longer-term securities. Basically,  the repo crisis -because it is a crisis- is telling us that liquidity providers are aware that the price of money, the assets used as collateral and the borrowers’ ability to repay are all artificially manipulated. That the safe asset is not as safe into a recession or global slowdown, that the price of money set by the Fed is incoherent with the reality of the risk and inflation in the economy, and that the liquidity providers cannot accept any more expensive “safe” assets even at higher rates because the rates are not close to enough, the asset is not even close to be safe and the debt and risk accumulated in other positions in their portfolio is too high and rising.

The repo market turmoil could have been justified if it had lasted one day.  However, it has taken a disguised quantitative easing purchase program to mildly contain it.

This is a symptom of a larger problem that is starting to manifest in apparently unconnected events, like the failed auctions of negative-yielding eurozone bonds or the bankruptcy of companies that barely needed the equivalent of one day of repo market injection to finance the working capital of another year.

This is a symptom of debt saturation and massive risk accumulation.  The evidence of the possibility of a major global slowdown, even a synchronized recession,  is showing that what financial institutions and investors have hoarded in recent years,  high-risk, low-return assets, is more dangerous than many of us believed.

It is very likely that the Fed injections become a norm, not an anomaly, and the Fed’s balance sheet is already rising. Like we have mentioned in China so many times, these injections are a symptom of a much more dangerous problem in the economy. The destruction of the credit mechanism through constant manipulation of rates and liquidity has created a much larger bubble than any of us can imagine. Like we have seen in China, it is part of the zombification of the economy and the proof that unconventional monetary measures have created much larger imbalances than the central planners expected.

The repo crisis tells us one thing. The collateral damages of excess liquidity include the destruction of the credit transmission mechanism, disguising the real assessment of risk and, more importantly, leads to a synchronized excess in debt that will not be solved by lower rates and more liquidity injections.

Many want to tell us that this episode is temporary. It has happened in the most advanced, diversified and competitive financial market. Now imagine if it happens in the Eurozone, for example.  This is, like the inverted yield curve and the massive rise in negative-yielding bonds, the tip of a truly scary iceberg.

Source: by Daniel Lacalle

Dollar Shortage Returns As Repo Usage Rises To Highest In A Week

This was the third consecutive increase in repo op usage, the highest in a week and the second highest since the start of the month.

Global Debt & Liquidity Crisis Update: NY Fed Announces Extension Of Overnight Repos Until Nov 4, Will Offer 8 More Term Repos

The Fed’s “temporary” liquidity injections are starting to look rather permanent…

Anyone who expected that the easing of the quarter-end funding squeeze in the repo market would mean the Fed would gradually fade its interventions in the repo market, was disappointed on Friday afternoon when the NY Fed announced it would extend the duration of overnight repo operations (with a total size of $75BN) for at least another month, while also offering no less than eight 2-week term repo operations until November 4, 2019, which confirms that the funding unlocked via term repo is no longer merely a part of the quarter-end arsenal but an integral part of the Fed’s overall “temporary” open market operations… which are starting to look quite permanent.

This is the statement published today by the NY Fed:

In accordance with the most recent Federal Open Market Committee (FOMC) directive, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will conduct a series of overnight and term repurchase agreement (repo) operations to help maintain the federal funds rate within the target range.

Effective the week of October 7, the Desk will offer term repos through the end of October as indicated in the schedule below. The Desk will continue to offer daily overnight repos for an aggregate amount of at least $75 billion each through Monday, November 4, 2019.

Securities eligible as collateral include Treasury, agency debt, and agency mortgage-backed securities. Awarded amounts may be less than the amount offered, depending on the total quantity of eligible propositions submitted. Additional details about the operations will be released each afternoon for the following day’s operation(s) on the Repurchase Agreement Operational Details web page. The operation schedule and parameters are subject to change if market conditions warrant or should the FOMC alter its guidance to the Desk.  

What this means is that until such time as the Fed launches Permanent Open Market Operations – either at the November or December FOMC meeting, which according to JPMorgan will be roughly $37BN per month, or approximately the same size as QE1…

… the NY Fed will continue to inject liquidity via the now standard TOMOs: overnight and term repos. At that point, watch as the Fed’s balance sheet, which rose by $185BN in the past month, continues rising indefinitely as QE4 is quietly launched to no fanfare.

And remember: whatever you do, don’t call it QE4!

Trader Gregory Mannarino breaks it down… 

Source: ZeroHedge