Repos and reverse reposThere has been talk here about this subject and its relationship to the US Government need to finance its bugetary debt.
The problem in all this is that the repo market while on the surface seems to be exceedingly simple, it is actually quite complex and when you dealing with trillions of dollars, the smallest hiccup can be devastating.
With that said here are some basic things that people here should be thinking about.
As a general rule rule, repos are short term financial instruments which can be summed up that famous sage from years gone by - nope not Yogi Berra but Wimpy..." I will gladly pay you on Tuesday for a hamburger today"
With the US Government running annual trillion dollar+ budgetary deficits for at least the next 9 years and probably forever, the repo market won't really help except for kicking the can down the road for a few days to get past a short term crunch (eg a tax collection date).
One of the underpinnings of the repo market is the need for both parties to the repo agreement to deliver on their committments. This is commonly called counterparty risk (ie Wimpy needs to be good for the money on Tuesday). The problem the US Government faces in all this is that if it was to use the repo market extensively, it runs the risk of defaulting on its end of the bargain or at a minimum having to raise emergency money quickly at some exhorbitant interest rate. This in turn would cause a world-wide financial crisis.
Yes it is possible that the Fed could help through its existing reverse repo facility but the current authority for this is swamped by the annual budgetary deficit. If greater authority was givien to the Fed to handle this, it would send a scary message throughout the world financial bond markets and probably destablize pretty much everything and bring into question as to whether the US dollar should continue to be the world's reserve currency (picture Chairman Xi with a big smile on his face).
If you go to this website, you will see upcoming Treasury Bill offerings schedule (
https://www.treasurydirect.gov/auctions/upcoming/) The two that have already been announced are about twice as big as the outstanding amount of that particular maturity!!
To put the magnitude of the problem into very simple terms, you can look at the what is happening in this way....
Between 1776 and 2023 (247 years), the US Government accumulated a national debt of approximately 31 trillion dollars. Over the next 9 years they will add (assuming that there isn't a recession and constant economic growth over this time period) an additional 20 trillion. In other words they will increase the national debt by some 66% over the next 9 years if everything goes right!! If everything doesn't go well then who knows?
If anyone doesn't think that is going to create some serious problems then I have two things for you..
1....something really great to smoke
2....a great bridge to sell
To complete this picture, the stock market is ignoring all this and the overall market sentiment is in the Excessive Greed category.
Anyway...some food for thought as you comtemplate your next moves.