A Unified Theory of What’s Gumming Up the Financial System
Endless waves of borrowing could be flooding the repo market.
Treasury Secretary Steven Mnuchin on February 6, 2018. That number has gone up a bit since then.
Photographer: Chip Somodevilla/Getty Images North AmericaThe overnight repo market is not exactly like a nuclear reactor. But it suffered something of a meltdown last week, and the Fed has been busy trying to contain the damage ever since.
The repo market powers the global financial system by letting banks briefly swap Treasury debt and other securities for cash. For several days now, the central bank has pumped it with liquidity to ease a cash shortage that briefly caused rates to spike to dangerous levels. All this might change once the fiscal quarter ends, but clearly something is not working. A little-remarked factor could be the walloping federal budget deficit, writes Brian Chappatta. Massive Treasury borrowing is flooding the market with more bonds than it can handle, which is forcing the Fed to mop it up to avoid a true market meltdown. Maybe deficits do matter after all?