— created to illustrate the types of trades that determine the equity futures basis (recently added to snapshots), which recently widened sharply from high demand (partly due to a certain space exploration company going public)

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🥷 MONEY MARKET SNAPSHOT (2026-06-12) 

BILLS
— RATES:
   • 1-month: 3.665%
   • 3-month: 3.708%
   • 6-month: 3.803%
   • 12-month: 3.859%
— AUCTIONS:
   • Treasury held no bill auctions today
   • Treasury will offer $89bln in 3m bills and $77bln in 6m bills on Monday, and $65bln in 6w bills on Tuesday
— SETTLEMENTS:
   •  (-)$20.596bln in bill paydowns (net negative issuance) this coming Tuesday 

COUPONS
— AUCTIONS:
   • Treasury held no coupon auctions today
   • Treasury will offer $13bln in 20y coupons on Tuesday, and $24bln in 5y coupons on Thursday
— SETTLEMENTS:
   • $79.001bln in net new cash raised (coupons issued) by Treasury tomorrow

TGA (TREASURY GENERAL ACCOUNT)
— LATEST CASH BALANCE: $800bln
  • a $1bln decrease from the previous update ($801bln)
  • $100bln below the Treasury’s target cash balance
— TARGET CASH BALANCE: $900bln

RESERVE BALANCES
— OUTSTANDING: Banks’ reserve balances rose $66.8bln to $3.08trln from $3.01trln since Wednesday
— NEW YORK: FRBNY held a 57.51% share of bank cash as of Wednesday
— SAN FRAN: FRBSF held a 10.98% share of bank cash as of Wednesday

FED OMOs (OPEN MARKET OPERATIONS)
— o/n SRPs, MORNING OPERATION: The Desk lent $0.0bln in the morning operation
— o/n SRPs, AFTERNOON OPERATION: The Desk lent $0.0bln in the afternoon operation
— o/n RRPs: The Desk accepted $0.454bln in the afternoon operation
— SEC LENDING: The Desk lent $37.95bln of SOMA securities to primary dealers

FED SECURED BENCHMARKS
— SOFR (o/n TSY REPO RATE AVG): 3.60% (prev: 3.59%)
  • TRADING RANGE: 3.57%-3.70%
  • 75TH PERCENTILE: 3.66%
  • 25TH PERCENTILE: 3.58%
  • SOFR-IORB SPREAD: -5bps (banks unlikely to be repo lenders) 
— TGCR (o/n TRIPARTY RATE AVG): 3.58% (prev: 3.57%)
— BGCR (TGCR + INTERDEALER RATE AVG): 3.58% (prev: 3.57%)

FED UNSECURED BENCHMARKS
— EFFR (o/n FF RATE AVG): 3.62% (prev: 3.62%)
  • TRADING RANGE: 3.60%-3.69%
  • 75TH PERCENTILE: 3.63%
  • 25TH PERCENTILE: 3.62%
  • IORB-EFFR SPREAD: 3bps (i.e. foreign banks arbing, on avg, 3bps)
— OBFR (EURODOLLARS): 3.62% (prev: 3.62%)
  • TRADING RANGE: 3.53%-3.68%
  • 75TH PERCENTILE: 3.63%
  • 25TH PERCENTILE: 3.62%
  • IORB-OBFR SPREAD: 3bps (i.e. foreign banks arbing, on avg, 3bps)

FED ADMINISTERED RATES
— SRPs: 3.75%
— IORB: 3.65%
— RRPs: 3.50%
— FRPs (FOREIGN REPO POOL): 3.50%

SECURED MARKETS
— REPO
  — RATES
    • GC
      • o/n: 3.68%
      • TERM
        • 1-week: 3.67%
        • 2-week: 3.67%
        • 1-month: 3.68%
    • OFR (OFFICE OF FINANCIAL RESEARCH)
      • o/n DVP (DELIVERY VS. PAYMENT): 3.61%
      • o/n GCF (INTERDEALER): 3.67%
      • o/n TPR (TRIPARTY): 3.65%
  — VOLUMES
    — FEDERAL RESERVE
      • SOFR: $3.061trln (prev: $3.023trln)
      • TGCR: $1.241trln (prev: $1.254trln)
      • BGCR: $1.269trln (prev: $1.281trln)
      • FRP (FOREIGN REPO POOL): $313.03bln (prev: $318.93bln)
    — OFR (OFFICE OF FINANCIAL RESEARCH)
      • o/n DVP (DELIVERY VS. PAYMENT): $2.836trln (prev: $2.784trln)
      • o/n GCF (INTERDEALER): $0.252trln (prev: $0.233trln)
      • o/n TPR (TRIPARTY): $2.329trln (prev: $2.338trln)
    — SPONSORED (AS REPORTED BY DTCC)
      • VOLUMES: $2.394trln
      • a decrease of $8bln from the previous release of $2.402trln 
      • Sponsored GC saw $0.738trln while Sponsored DVP saw $1.656trln
  — FAILS (AS REPORTED BY DTCC)
    • TSY: $23.17bln
    • AGENCY: $0.01bln 
— FX IMPLIED (€/$)
  — RATES
    • 3-month: 3.79%

UNSECURED MARKETS
— FED FUNDS
  • VOLUMES
    • EFFR (o/n FF): $106bln (prev: $106bln)
— EURODOLLARS    
  • VOLUMES
    • OBFR: $247bln (prev: $239bln)
— COMMERCIAL PAPER
  • RATES (AA FIN) 
    • o/n: 3.61%
    • 1-week: 3.62%
    • 1-month: 3.67%
    • 3-month: 3.76%
  • ISSUES (AA FIN)
    • o/n: 159 issues at ~o/n tenors
    • 1-month: no issues at ~1m tenors
    • 3-month: no issues at ~3m tenors
  • OUTSTANDING 
    • FINANCIAL CP: $625.25bln
    • NON-FINANCIAL CP: $368.40bln
    • ASSET-BACKED CP: $460.21bln
    • BESPOKE: $9.79bln

BASIS MARKETS
— SOFR-FF (SERFF)
  • LATEST (Jun’26): 0.5bps
  • NEXT (Jul’26): -1bps
  • YEAR-END (Dec’26): -3.5bps
— XCCY
  • €/$ (3-month): -0.625bps
— EQUITY FUTURES (S&P500)
  • LATEST: +104bps over o/n FF (prev: +138.5bps)
  • YEAR-END: +77bps over o/n FF (prev: +78bps)

SOURCES: U.S. TREASURY, FRBNY, OFR, OTC, DTCC, CME, CIA (CONKS INTELLIGENCE AGENCY)
DISCLAIMER: Not financial advice. By viewing this content, you agree to the terms (https://www.conks.plumbing/tos) under CHAT FEED TERMS

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First, it’s useful to distinguish between “SOFR-FF” and “SOFR-FF basis”. These terms have the same meaning: simply, the Fed’s SOFR (repo rate benchmark) minus the Fed’s EFFR (average overnight unsecured lending rate between banks) — where “FF” (Fed Funds a.k.a bank reserves) is used as a shorthand for EFFR.

If SOFR “prints” (i.e. is published) at 4.00% and FF at 3.90%, SOFR-FF (i.e. a shorthand for “SOFR-FF basis”) equals 10bps (4-3.90=0.10=10bps), and thus a measure of liquidity conditions that most would consider tight: a wider (i.e. more positive) SOFR-FF basis usually implies tighter funding conditions, and vice versa. SOFR is an active market, so rates move with liquidity conditions, while the Fed Funds market remains “undead”, with only ~$100bln in volume. EFFR tends to print in a straight line unless we see a large cash influx or outflow at the ultra-short-end.

To take it a step further, a SOFR-FF basis SPREAD is the difference between two SOFR-FF bases (plural of basis) at two different times. This shows the relative (expected) liquidity/funding conditions between two periods. For instance, July 2026 and Sept 2026 may have differing catalysts, like varying bill issuance and demand for leverage, etc., that produce different “implied” (i.e what the futures market thinks of) conditions and therefore different expected SOFR-FF bases.

You can view the basis SPREAD between July ‘26 & Sept ‘26 via TradingView by searching: CME:SR1N2026-CBOT:ZQN2026-(CME:SR1U2026-CBOT:ZQU2026) or on BBG via SERFFN6/U6 (note: CBOT is part of CME). The letters “N” and “U” represent July & September, not the first characters of months. Instead, CME uses the following letters (known officially as “calendar codes”):

Now, let’s say the market thinks (note: not a real-world situation and using round numbers, instead of real-time quotes, for clarity) the gap (i.e. basis) between SOFR and FF in July 2026 will be 10bps wider than that in September 2026, due to reserve injections by the Fed happening in September but not in July, resulting in a larger gap between SOFR and FF in July 2026 than in September 2026. The math laid out may assist in understanding:

However, you will likely be viewing the spread via futures, where contracts are priced at 100 minus the implied market rate. Subsequently, a positive SOFR-FF basis will be priced as a negative value, and vice versa, in the futures market. “Quick maths” shows this in action:

So when the futures market for SOFR-FF basis “sells off”, that’s the basis getting larger (suggesting tighter funding conditions), not narrowing. Again, some quick maths:

Accordingly, a -0.15 (-15bps) futures spread actually means an average SOFR-FF of +15bps for a certain month, and an increase in the SOFR-FF basis of +5bps in the above example.

Using another example, let’s say the SOFR-FF futures basis is priced at -10bps on the last day of July 2026, and let’s say it never changes until the end of July. SOFR stays at 4.00, and EFFR stays at 3.90. Subsequently, the “realized” SOFR-FF basis (i.e. using the Fed’s published data for SOFR and EFFR) equals 10bps (0.10), but the SOFR-FF basis in the futures market will be priced at -10bps (-0.10).

The same applies to SOFR-FF basis SPREADS. To simplify, participants tend to use jargon: “July/Sept‘26 SOFR-FF” is used to denote the SOFR-FF basis SPREAD between July 2026 and Sept 2026 i.e. the difference in the SOFR-FF basis between Jul’26 and Sept’26. The jargon for the futures market is “Jul/Sept‘26 SERFF”, where SERFF is just the futures market ticker for the SOFR-FF basis on Bloomberg terminals. Some SOFR-FF traders will call themselves “SERFF traders”.

Hence…

In English, we have a 10bps wider SOFR-FF basis priced in for July than September because the futures market calculates everything “upside down”. Since a wider1 basis (in our simplified world) implies tighter conditions, the market expects tighter funding conditions in July than in September. This will be reflected in the futures market for SOFR-FF “selling off”. For instance, in December 2025 (last year), Dec’25 SERFF sold off as the Fed’s QT was set to tighten conditions, until rumors of QT ending arose.

Why bother learning this? The SOFR-FF basis is considered the primary proxy for liquidity conditions (and with basis spreads, relative conditions) in money markets, and something you should add to your arsenal. Every rates desk will trade this and have a house view on SERFF, the most common lingo for SOFR-FF. Although some city traders and dealers prefer a variety of phrases.

That’s a wrap. Follow snapshots for daily SERFF!

An “unofficial” attempt by monetary leaders to lower money market rates4 has led to an abundance of $ liquidity, a cash flood so powerful that it caused the Fed’s benchmark for interbank rates (EFFR shown above) to finally print lower. Central bank injections combined with numerous catalysts, outside the Fed’s control, have pushed o/n rates to the lower bound. Fed operations have swept up collateral5, the U.S. Treasury has reduced its supply6, and FHLBs (Federal Home Loan Banks) have temporarily flooded U.S repo markets with cash7. Likewise, “war volatility” has been fueling uncertainty further out on the curve, prompting desks to park more liquidity in money market funds. All these catalysts have generated a cash surge, driving down the ultra-short-end.

Even so, markets failed to anticipate8 such a sharp plunge in rates9. Its primary driver also remains undetermined. So much so, even the largest dealer desks struggled to decode the puzzle.

What is known, however, is that cash is failing to find adequate paper10. An abundance of cash chasing a scarce supply of collateral has generated an over-compression of money market rates, and its undoing requires creating a drag on $ liquidity. The Fed’s plumbing “reaction function” is thus about to change.

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But after the Fed’s destruction of trillions of dollars in excess reserves, the game has changed. A multi-billion interbank swing could decrease levels enough to reach the system’s dreaded lowest comfortable level of reserves (a.k.a LCLoR). Still wanting to prevent another money market disruption3, financial thought leaders have devised a plan to impose a new Treasury-Fed plumbing accord, via the creation of “TGA repos”.

By Conks’ estimates, reserve balances lie only ~$250 billion, a common swing in the U.S. empire’s cash balance, above the “danger zone”. Meanwhile, the TGA often continues to accumulate a mammoth “excess” buffer, above even the week of outflows the U.S. Treasury targets. A TGA repo “market” could thus provide an offset, becoming the mechanism to avert the next money market uproar. Yet barriers remain.

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But for at least the next few months, it’s business as usual. The Fed may be reducing its RMOs, yet it’s still pumping $25 billion per month into the interbank ecosystem. The endgame for reserve injections is what Conks calls “reserve stasis”, where the U.S. central bank injects zero net positive interbank liquidity, other than $20 bln in reserves to offset those destroyed1 or neutralized in the TGA or foreign repo pool. A rumored balance sheet shrinkage under Warsh will have to wait, as the Fed’s Old Guard won’t risk tempting fate near the system’s lowest comfortable level of reserves (a.k.a LCLoR).

The Great Compression trade is nonetheless reaching its prime. In Oct’25, traders were betting when the Fed would fire its monetary bazooka. In Dec’25, they moved on to predicting a peak in reserve injections. Now, in May’26, traders are anticipating when the Fed will stop reducing its RMOs, with Powell leaving reserve injections on autopilot2 until a Warsh-led Fed alters the playing field.

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All the best, C.

APRIL 22, 2026: LIQUIDITY AT THE (ULTRA) SHORT END

Peace at the ultra-short-end of the curve, at least until the Fed attempts an unsavory shrinkage of its balance sheet, remains intact. All plumbing gauges, from the SOFR-FF basis to swap spreads, indicate that frictions are minimal and liquidity is flowing, a dynamic that has spread to the rest of the UST (U.S. Treasury) curve (>1y).

In geopolitics, it takes two to TACO to maintain stability. in plumbing, it takes two powerful forces of the sovereign, buybacks and RMOs (reserve management operations/purchases), to aid debt market functioning amid large auction tails & outright selling. Cash management buybacks (CMBs), where the Treasury uses (TGA) cash to buy back previously issued bills, have reduced unwanted supply, while RMOs, where the Fed prints reserves to buy bills from primary dealers, reduce the need for dealers to warehouse (i.e., hold) more supply on their books. Buybacks & RMOs have been offsetting the cost of warehousing USTs, especially further out on the curve, where greater levels of duration risk linger. Since dealers are looking to earn spread, not speculate on direction, dealers use repos (and other derivatives) to hedge against the duration risk of holding USTs outright. This applies upward pressure to overnight (o/n) rates (and general money market rates), one of the only forces working against the Fed maintaining SOFR in their desired sweet spot — just below IORB.

As Conks has noted, dealers can’t clear their inventories as easily as they used to pre-COVID, due to (among other things) record high deficits and foreign investors & carry traders (ex-some parts of Europe) earning negative carry for holding FX-hedged USTs. This Great Balance Sheet Congestion continues to boost primary dealer holdings, especially at the belly (>2y <10y), to all-time highs. Overall, primary dealers are harboring a record net long UST position of over $500 billion. Balance sheets are jam-packed.

Nevertheless, market liquidity remains resilient, aided by private-sector innovations (such as an ever-increasing shadow cash market - see our “The Shadow Cash Market” Series). The U.S. empire, of course, is likewise full of alchemy. On top of incoming deregulation, the Fed has bought ~$200b via RMPs while Bessent’s Treasury has vacuumed the same amount of short-end supply via CMBs, not forgetting its other type of buyback (i.e., liquidity buybacks) targeting most of the curve.

Demand and supply play a key role in determining moves in ultra-short-end rates (<1y), such as o/n GC, but play a less important role in determining the direction of rates at the UST short-end (>1y). With the latter, imbalances merely exacerbate rate moves. The sovereign, however, is dampening volatility by the most in history. Front-end rates markets are more resilient... but at the cost of opportunity.

APRIL 23, 2026: WAR & DOLLAR SWAP LINES

In a testimony yesterday, Bessent mentioned that the UAE, other GCC states, and some Asian states requested $ swap lines to prevent potential firesales of USTs (U.S Treasuries). This is puzzling, considering all these nations have access to the Fed’s FIMA repo facility (pledge USTs and receive dollars in return, minus a 1-5% haircut depending on maturity), available to “public banks” like foreign central banks and finance ministries, where they don’t have to sell their holdings and can tap dollars at a cheaper (overnight) rate than receiving swap line liquidity.

Given the semi-relaxed state of global $ dollar funding markets and the fact that GCC states have more access to dollars via their SWFs (sovereign wealth funds) than available in the Treasury’s stabilization fund, the actual need for (and market impact of a) swap line to Asia would be minimal, and why use it when you have cheaper alternatives to tap dollars?

All in all, a nothingburger (but a great reason to post a Conks infographic).

APRIL 27, 2026: NOTHING EVER HAPPENS (REDUX)

The two-week pause has morphed into something else entirely, but the Peak-TACO thesis of resilient equities and hesitant rates has nonetheless transpired. Iran is still deploying “War & Plumbing” tactics, such as uncertainty via mines, provoking a delayed opening of the Strait that shall not be named. Regardless, aside from short-term rates not repricing, markets have moved back to “nothing ever happens.”

As Warsh is starting to recapture the headlines following his eclectic confirmation hearing, plus Tillis dropping his boycott, existing catalysts should begin to have a more dominant impact on pricing in some markets. It’s the beginning of the end of smooth sailing for ultra-short-term rates desks, as the June ‘27 deadline for a centrally cleared Treasury market grows nearer. Participants finally start, from year-end, to exodus uncleared repo markets en masse (and potentially applying upward pressure to SOFR), alongside an attempt to reduce the Fed’s balance sheet as early as December. Year-end SOFR-FF (Dec’26), despite these impending pressures, is only hovering around a 4-5bps basis (i.e. the gap between SOFR and FF), and mispricings likely expand into next year (‘27).

Before Warsh, however, no official in the Old Guard will be trying to stoke volatility. As usual, with the comfort of potential rate cuts at the first sign of economic weakness, the brief pre-Warsh period will incur minimal drag on risk assets. meanwhile, immediate term SOFR-FF (SERFF) longs must take a — well-deserved — breather. short-end cross-currency (XCCY) bases and swap spreads should “rally” further, i.e. three-month XCCY basis tightening (less negative) and 2-year swap spreads widening (also less negative), as minimal tax day volatility proved funding market liquidity and resiliency has moved way into ample territory.

Likewise, no one is trying to spur volatility at the long end of the curve. Bessent is busy playing macro with even more (this time, questionable) strategies to dampen long-end sales from Asia. Even so, investors are also remembering what Warsh could unleash. The fear of the new Fed Chair raising “term premium”, or whatever investors like to call increased risk premium, will help fuel cuts, but more likely spur an even greater UST steepener.

READ AS SOON AS THEY'RE PUBLISHED:

If you act on anything provided in this newsletter, you agree to the terms in this disclaimer. Everything in this newsletter is for educational and entertainment purposes only and NOT investment advice. Nothing in this newsletter is an offer to sell or to buy any security. The author is not responsible for any financial loss you may incur by acting on any information provided in this newsletter. Before making any investment decisions, talk to a financial advisor.

EFFR, OBFR, SOFR, TGCR, and BGCR are subject to the Terms of Use posted at newyorkfed.org. The New York Fed is not responsible for publication of tri-party data from the Bank of New York Mellon (BNYM) or GCF Repo/Delivery-versus-Payment (DVP) repo data via DTCC Solutions LLC (“Solutions”), an affiliate of The Depository Trust & Clearing Corporation, & OFR, does not sanction or endorse any particular republication, and has no liability for your use.

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Markets exposed to a potential tax day blind spot7 have overlooked the now-low risk of a squeeze and respected the near-abundance of cash seeping into repo markets, evidenced by Mar/Apr’26 SOFR-FF8 (below) turning positive. As for the rest of the SOFR-FF curve, further compression is possible but will result in slim pickings for traders. For more significant moves, they must venture into stormier regions.

Volatility, thus opportunity, lies outside the comfort of o/n (overnight) markets. As laid out in War & Plumbing, a longer battle is more likely than a quick resolution, with conflict extending beyond late April resulting not just in zero rate cuts but also hikes9, ex-U.S. Despite what POTUS declares via social media, no true TACO remains on the table.

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— created as part of The Warsh Ultimatum (upcoming)

The geopolitical chessboard, however, suggests the latter. Trump had been widely depicted as the first U.S. leader, perhaps in a century, to attempt a transition away from a longstanding unipolar U.S. order. Instead, as shown by capturing Maduro, increasing arms sales, and seeking to annex multiple islands, Trump has turned out to be a unipolar hawk. Instead of ushering in a multipolar world, POTUS has upheld America’s global “security pact”, in which the developed world, ex-Iran and Russia3, “employs” the U.S. empire to enforce clear waters and airways, enabling free trade. Enemies of this security pact face the reality that damaging global trade, financial markets, and the U.S. dollar hurts them more than they hurt America and its allies. Inflicting substantial harm to the U.S. empire must (and has) come from within. Nevertheless, attempts to destabilize the U.S. security pact — such as imposing sky-high tariffs — have illustrated that even the most disruptive U.S. leader ultimately defends the unipolar status quo.

Unable to contest such a power structure, Iran must resort to undermining the U.S. Yet Iran’s recent activities have spurred Trump to embark on another Middle Eastern foray. Most disputes, even during the Trump presidency, have died down quickly. But after eliminating Iran’s Supreme Leader, POTUS can’t simply pack his bags and leave. This looks to be the first “happening” that could take weeks, months, or years to resolve.

Unfortunately for markets, this war will inflict a slow burn on asset prices, with neither the Fed nor the U.S. govt supplying fuel for risk-taking. No sudden market move, not even a spike in Crude, should trigger the U.S. admin’s (low) tolerance level for market instability, one that would trigger the next TACO.

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While repo rates continue to decline, higher interbank volumes have reduced the odds of o/n FF (a.k.a EFFR) printing lower, preserving a narrower1 SOFR-FF basis.

Swap spreads, meanwhile, may have widened (i.e. grown less negative) significantly, signaling easier plumbing conditions. Nevertheless, they could rally further. Fed proposals advocating for increasingly loose bank regulation should emerge by the end of Q1 this year.

As is evident, the Fed’s swift suppression of volatility has transformed money markets for better or worse, depending on the participant. It’s good news for U.S. monetary leaders who’ve compressed the overnight (o/n) rates complex to recent all-time lows, but bad news for some STIR traders starved of both volatility and thus opportunity. After the demise of the Fed’s QT, the Great Compression — i.e. a further narrowing across the SOFR-FF curve, post the Fed concluding its balance sheet reduction and starting reserve injections a.k.a RMOs — has been the only prominent trade. As anticipated, a few relative value plays have also emerged, based on the timing and size of the upcoming reduction in Fed purchases. But none offer, in Conks’ view, sizeable risk-versus-reward. Market participants must look further afield.

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— created as part of The Warsh Ultimatum (upcoming)

With a Great Compression in money market rates underway, it’s the ideal moment for Fed officials to switch to a new target rate. As Part I unveiled in detail, volume in overnight Fed Funds (o/n FF) — the average rate of which the Fed currently targets to influence economic and financial conditions — has collapsed. Remaining o/n FF activities also fail to reflect the actual cost of tapping U.S. dollars while remaining vulnerable to a cluster of emerging rival interbank markets. The mechanism underlying the U.S. central bank’s primary monetary tool is thus approaching its breaking point.

For decades, targeting an unsecured interbank rate, such as o/n FF, made total sense. The Fed Funds market thrived and reflected the genuine price at which banks financed their operations. That ended, however, in 2008, with Lehman Brothers’ sudden demise. Unsecured interbank volumes soon fell by ~80%, while reserves injected by the Fed ballooned by multiple trillions. The latter has served as a stabilizing force for EFFR (i.e. o/n FF), enabling officials to avoid updating the target rate for more than a decade. Regardless, instability has risen sufficiently to warrant the next target-rate evolution.

To supplant o/n FF, central bank alchemists will explore multiple configurations: targeting an administered rate (e.g., IORB or o/n RRP), targeting an existing benchmark, assembling a “rates basket” and targeting its average, or constructing and targeting a new benchmark altogether. The ideal successor, though, grows evident quickly.

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— created as part of The Fed’s New Target

The Fed will hope SOFR stays in its sweet spot, as the major $ clearers remain less willing to step in. The “Big Six” banks, led by JPMorgan, have ostensibly front-run cuts by swapping out more of their reserves for USTs (U.S. Treasuries)1, while those bearing unrealized losses in their investment portfolios hoard an extra reserve2 cushion to stem uneasy outflows. Further rate cuts by the Fed will only decrease large banks’ “excess” reserves further but increase their willingness to step in with their remaining balances at lower spreads3, containing o/n rates. Cuts are also an antidote to the weakening macro outlook, a win-win for monetary leaders.

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Given the amount of information required to demonstrate the complete flows of a repo trade, the graphic is tough to navigate without a PDF version. Subsequently, we’re providing one for all readers below.

Conks Infographic The Modern Repo Market

20.9MB ∙ PDF file

Download

Download

Still, even with complete visuals, a written explanation is needed to comprehend such an intricate ecosystem. Welcome to a Repo 101: a brief primer that will complement Part II of our current target rate series, covering repo lingo and mechanics in plain English. This is not the usual Conks style of article. Instead, it’s written to clarify all key repo fundamentals and rates as concisely as possible.

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— created as part of The Fed’s New Target

A decent zoom feature will be required to navigate this extensive infographic, but the image viewer on Substack does not seem to be sufficient. Consequently, it’s recommended to download and view the graphic outside of the Substack website on a retina desktop or a high-quality tablet — such as in Apple Preview/Microsoft Photos. Flows start in the top-right (with the green “start here” box) and move from right to left. Plus, it’s best to read the chart legend to learn all the necessary lingo. The Fed’s New Target: Part II will provide more details soon. Enjoy!

Money markets have experienced yet another quiet year-end. Just a week after ending its balance-sheet taper — where officials shrink the central bank balance sheet via QT1 — the U.S. central bank has commenced an onslaught of reserve injections, marking the start of a Great Compression in money-market rates. Year-end will soon turn into a distant memory, with repo rates (SOFR) set to print well below the Fed’s new fixed SRP (Standing Repo) rate while emergency Fed volumes top out. Large U.S. Treasury (UST) issuance combined with tighter liquidity was destined to make rate spikes a regular feature of the o/n (overnight) rates complex. Yet, the Fed’s RMOs (reserve management operations) have thwarted any chance of a plumbing “hard landing”2. The subsequent Great Compression should not just contain rates within the U.S. central bank’s limits but enable officials to enforce a fully secured standard, no longer targeting overnight Fed Funds (o/n FF) but one of its numerous repo benchmarks. A target rate evolution is looming.

Just as the Fed’s new permanent open market operations (POMOs) have commenced3, a lengthy balance-sheet winter has concluded. Banks' balance sheets, upon the year-end “air pocket” in money markets4, are now destined to expand rapidly, with expected plumbing relief priced in. The lengthy “tug of war” in (swap) spreads, Conks’ real-time gauge for measuring UST market frictions, has ended with an easing of constraints as the victor. This outcome was decided5 in part via one of the most noteworthy6 central bank leaders proposing a shift from targeting an unsecured rate (o/n FF) to targeting a “new-age” secured benchmark (repo) — a move intended to subdue volatility while granting the Fed even greater dominion over money markets7.

Upon delivering a speech at the end of September last year, Dallas Fed President Logan8 has initiated a shift toward the U.S. central bank replacing EFFR — the benchmark for unsecured9 interbank (i.e. o/n FF) rates10 — with a repo benchmark as its “policy rate”, the Fed’s primary mechanism it uses to influence U.S. (hence global) financial and economic conditions. The last prominent evolution, the switch from LIBOR11 to SOFR12, was completed just a few years ago, a decade after private and public-sector behemoths13 sought to oust an unsecured standard, led by LIBOR, from the mainstream. Back then, a potential successor was whittled down to OBFR14, a semi-global unsecured dollar rate, and SOFR, a secured overnight (repo) rate, with the latter crowned as the leading global benchmark for pricing trillions of dollars in financial assets. Yet, despite SOFR becoming LIBOR’s successor, monetary leaders still retained part of the old standard, preserving o/n FF (EFFR) as their desired target rate.

To this day, it has endured. But not for much longer. The near-death of the unsecured interbank market15 has set the stage for monetary leaders to complete the shift away from targeting rates based on unsecured dealings. Central bank officials have grown wary of the frail linkages, primarily opportunistic arbitrage trades, binding the Fed Funds market together.

Even so, rising uncertainty among major interbank players will be just one motivation for Fed alchemists to change targets. A fully secured standard awaits.

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