Something Is Breaking in the Money Markets (Again)
Source: YouTube · Eurodollar University · published Oct 27, 2025 · 19:03
The Federal Reserve's persistent repo facility usage indicates growing financial instability, with banks accumulating safe assets while reducing lending to shadow banks due to global risk aversion, not quantitative tightening 0:00-0:07.
Key Takeaways:
• US depository institutions have piled up Treasury and agency bonds reaching nearly $2 trillion, a 12% increase since January, showing risk aversion 0:32-0:38
• Bank lending to shadow banks has slowed dramatically from 10% quarterly growth to just 3-4%, contributing to cash tightness in money markets 0:55-1:06
• Fed repo facility usage reached $8.4 billion in a single day, the most since 2020, while benchmark repo rates surged above the Fed's upper limit 2:01-2:43
• The Fed itself admits economists "know even less" about QT impacts than QE, revealing they have little evidence that bank reserves affect monetary conditions 7:55-8:05
• Similar patterns are emerging in Europe, with banks also reducing shadow bank lending while accumulating government bonds 15:33-16:00
The developing financial stress shows similarities to 2019 and will likely force the Fed to end quantitative tightening despite their uncertainty about its actual effects 18:42-18:46.
Sources:
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First 800 characters of the transcript
Another day, another significant borrowing from the Federal Reserve's repo facility. This gotten to be a regular occurrence and concurrent with money rates rising due to the cash squeeze I told you about yesterday. Starting to see a lot of similarities to 2019. That's going to have the Fed not only cutting rates, but talking about ending their balance sheet runoff, even if Steve doesn't necessarily agree with me right now. But that's what's happening with central banks. More importantly, what's going on with actual banks? US depository institutions are continuing to pile up Treasury and agency bonds in their securities holdings combined now just under two trillion. And for context, that total was just 1.75 trillion back in January around when the current bull steepening phase really did ge…