Dear Steemleo community,
starting earlier this week rates in the repo market spiked up to 10%, so the Fed stepped in an injected $53 billion on Tuesday ,$75 billion Wednesday and again $75 billion on Thursday to clam down markets and bring back the overnight lending rate back in line.
When banks need to borrow cash on a short term basis (usually overnight) they use US treasuries as a collateral.
A spike from around 2.5% in the overnight repo rate up to 10% is a pretty big move, which reminded everyone of 2008.
That's why the Fed acted so boldly.
An average liquidity injection of $68 billion per day over three days is also a pretty big number, but let's have a closer look how big this number really is.
As you can see in the chart, the average daily trading volume in all expirations is close to $600 billion.
So the Fed took over 11.28% of the market.
Definitely a huge number and as a free market guy I don't like this at all.
I honestly don't know. Nobody knows, but it is definitely a red flag popping up.
Let's have a look at debt markets to get a better picture.
Since I don't know what is your knowledge about the bond markets, let me give you some general information first.
1. Yields and Bond Prices:
2. Available Futures:
The term Eurodollar has nothing to do with the Eurocurrency.
Eurodollars are USD held/created outside the US.
60-70% of all the USD are created (by giving a loan) outside the US.
Now let's have a look at a chart:
Source: tastyworks.com
To get the yield on the Eurodollar contract, you need to subtract the actual price from 100.
The yields have gone up during the past 10 days, but nothing to worry about.
Basically we are back were we have been some weeks ago.
Source: tastyworks.com
To get the yield on the 10 year notes, you have to look up ticker symbol TNX.
Source: tastyworks.com
Basically the same picture as in the Eurodollar futures.
Source: tastyworks.com
And a look at the bond yields (TYX):
Source: tastyworks.com
Also nothing special here.
To sum this up, we always should worry, when the Fed is trying to steer what should be free markets and their recent repo action is definitely a red flag, but it doesn't seem like the bond markets are worrying too much.
But we should definitely keep an eye on it, especially on the Eurodollar.
If we see a big spike in short term rates, then it is probably time to run for the hills.
If you want to learn more about the financial markets, especially options trading, please check out my books.
Available on iTunes Amazon Google.
Stephan Haller
