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Wednesday, October 08, 2008


repo fails

something new and weird in the interbank lending market, via the ft.

The reluctance to lend between banks and other investors has also created chaos in the government repurchase or repo market, another important source of short-term funds for banks. In a repo transaction, sellers of debt securities promise to buy them back later for an agreed price.

Investors have stopped lending cash to banks even in return for collateral such as US Treasuries. That has broken the chain of lending between numerous banks to such an extent that borrowed securities have not been returned. These so-called "repo fails" prompted the US Treasury yesterday to re-open various Treasury issues and sell more debt yesterday.

that led to the very poor auction in the ten year bond as treasury tries to get enough supply into the market to meet demand.

there is a hell of a lot of pressure in funding markets now.

UPDATE: more from yves smith.

The Financial Times mentioned a particularly troubling development, that banks are not even lending to each other on a repo. In a repo, a bank sells liquid, high credit quality securities under an agreement to repurchase, and gets cash in the interim. The fact that they will not lend in return for collateral is mind-boggling.

dogs eating dogs -- this has devolved into beggar-thy-neighbor.

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