Can Negative Rates in the Repo Markets Indicate a Financial Crisis is Near?
When the repo markets have negative rates, it may lead economists and investors to believe the national economy will most likely experience an economic downturn. They are questioning if negative market rates will cause the next financial crisis, after the 2008 global financial crash.
Investor George Gammon experienced how governments, central banks, and repo markets control economies that can affect financial freedom. On his YouTube Channel, he shares the possibilities of a financial crisis to help you make better decisions about your finances and build wealth (Gammon, 2021).
If you have an interest in real estate, investments, and economics, he has the expertise you can rely on for helpful information. He found success by creating a strategy to maintain and protect his wealth during most economic conditions, including crashes, inflation, and deflation.
What are Repo Markets?
Repos are purchasing agreements or contracts between two parties with the promise of repurchasing the asset at a later date. The way it works in the repo markets is by allowing financial institutions, corporations, and governments, such as the Federal Reserve and municipalities, to provide collateral loans among each other.
According to the Securities Industry and Financial Markets Association (SIFMA, 2021), the purpose of repo's is to help US Treasuries and other cash markets.
The system allows security dealers to serve as market makers and sell securities to provide fluidity to the markets. If there are imbalances in short-term purchases and sales of customer orders, the dealers must take the opposite side of the trade contract.
Repo markets comprise instruments of financed assets including money market, corporate bonds, and federal agency and mortgage-backed securities.
Characteristics of Healthy Repo Markets
Market dealers and firms receiving the cash and securities accessibility are a sure sign that repo markets are healthy. They can conduct transactions and keep the secondary cash markets operating smoothly. The benefits for the issuers are lower interest rates and the ability to finance and source securities. If the rates are low, the US Treasury, for example, will lower the costs of debt servicing the taxpayers have to pay.
Investors can manage excess cash balances more efficiently and safely when they invest with firms and dealers. Market repo's benefit by receiving reduced funding costs and the ability to finance long positions and cover short positions for their client’s satisfaction.
Since the global Covid-19 pandemic in 2020, rates surged and the poverty level skyrocketed. When you consider the impact of the pandemic and the government stepping up to help Americans, small businesses, and corporations, it could contribute to unhealthy repo markets.
A Silent Financial Crisis in 2020
During the pandemic, output received a hit with declines around the globe and small companies had to close permanently because of lockdowns.
Carmen Reinhart published an article posted on World Bank Blogs and stated she believes the trends exist and is leading to a quieter crisis (Reinhart, 2021). She says it could interfere with the prospective recovery of the economies in coming years, especially in the financial sector.
NPLs, known as non-performing loans, continue to rise in the market and will definitely affect financial institutions. The pandemic hit low-income families the hardest during the pandemic and small companies with little to no assets to protect them from economic conditions.
The US government executed expansible monetary/fiscal policies to counterbalance sharp economic declines.
Banks began supporting macroeconomic stimulus using temporary loan intermission. These financial institutions are providing the borrowers with grace periods to repay their debt at lower interests and attractive terms.
It continues in March 2021 and is impacting the national and international economies. Reinhart noted that downgraded sovereign credit ratings were at an all-time high last year.
Banks will have no other choice but to take losses on their government security holdings. Her argument is that the pandemic damaged the global economy and balance sheets of those financial institutions.
As George Gammon pointed out in his YouTube video, if the Fed purchases treasuries from banks, it can be a negative sign leading to the economy collapsing and a near financial crisis.
How Natural Disasters in America Can Lead to an Economic Downfall
Global natural disasters influence economies, property owners, and repo markets.
Continuous events, Covid-19, and politics can very well lead to another financial crisis similar to the 2008 global financial crash if housing prices collapse. The blame will lie in the hands of the Federal government because of their neglect to confront the issues.
Harvard Finance Senior Lecturer, John Macomber, shared with Harvard Business Review in a phone interview that the Biden Administration can prevent the financial crisis (Harrell, 2020).
How long it will take for the housing market to stop ignoring the risks of climate change is undetermined for now. With a new White House Administration, it is hopeful that the issues reach discussions for solutions.
In the US, damages are speeding up with billions of dollars in losses in states known for natural fires and flooding. What really needs to be on the top of the discussion list is the problem of rebuilding or constructing in those same areas repeatedly over the years.
In California, for example, wildfires continue to be a problem for over a century now with no resolution.
The State of CA has no restrictions for building or rebuilding structures in wildfire areas and mandates insurances companies to renew insurance policies at below-market rates.
Macomber believes that this helps to persuade people to invest in the housing market and exposes them to higher risks. Who covers the additional risky costs? It is the federal government that handles those costs to repair and rebuild damaged homes.
The present financial system cannot bear increased natural disasters, tight government budgets, and the financial effects of Covid-19.
The housing market in the financial sector can easily trigger an economic crisis in the US, if the Biden Administration delays addressing the issues. Those homes in high-risk regions have inflated prices and will eventually cause the housing prices to plummet and decline in property value.
Insurance companies will definitely increase their premiums after there is no more support and downgraded bond ratings. They take part in repo markets as the banks, pension funds, hedge funds, and securities dealers. Governments including the Federal Reserve in NY, municipalities, and corporations are all participants in the market of repo's.
Why Negative Interest Rates Can Lead to a Financial Crisis and Economic Downfall?
When interest rates are in the negative, repo markets are essentially trading with no interest rates and paying entities to borrow their cash for collateral. Those entities covet treasuries to sell them and repurchase them at a cheaper cost from the repo markets.
Banks, for example, want them because they believe the interest rates will increase and the Fed will buy the treasuries. George Gammon shares with investors that it is a code red sign and wants to inform you and others of the possibilities of a financial crisis.
It is the Fed that makes the treasuries extremely priceless and attractive for banks and other market makers. This can become problematic if the market doesn’t have the collateral to function correctly, causing instability of the entire financial system.
A shortage of dollars in national and global economies may be the result.
Can negative repo markets show a financial crisis in the near future? Gammon responds with a yes and no. His explanation is that it would not be an issue if it only involved the repo markets.
When the Fed, government, and central banks intervene, it can turn into a global financial crisis. He wants investors to consider the possibilities of a housing market crash in the financial sector and make better decisions.
His goal is to provide them with more financial decisions to build wealth when the economy is healthy, troubled, or in a crisis.
With the New York Feds and the Biden Administration working collectively on stabilizing the national economy, the US can avoid another financial crisis.
The Fed works with participants to monitor the infrastructure of repo's and makes recommendations for reforms as necessary to ensure stable markets.
It is significant that corporations, dealers, financial institutions, and governments have the funding sources when the market is in a stressful economic condition.
To learn more about repo markets and how to free yourself from the bondage of debt, you can watch the video above on negative repo market rates and the possibility of the next financial crisis.
References:
Gammon, G. (2021, March 19). Repo Market Rates Turn Negative Is It Signaling the Next
Financial Crisis. Retrieved from https://www.georgegammon.com/repo-market-rates-turn-
negative-is-it-signaling-the-next-financial-crisis/
SIFMA. (2021, January 21). US Repo Market Fact Sheet. Retrieved from
https://www.sifma.org/resources/research/us-repo-market-fact-sheet/
Reinhart, C. (2021, January 07). Quiet Financial Crisis. Retrieved from
https://blogs.worldbank.org/developmenttalk/quiet-financial-crisis
Harrell, E. (2020, December 18). Are We On the Verge of Another Financial Crisis.
Harvard Business Review. Retrieved from https://hbr.org/2020/12/are-we-on-the-verge-
of-another-financial-crisis