Capital Advisors Group posted its latest update, "Repo Reveals Hidden Issues in Liquidity Markets," late last week. Their new piece tells us, "Rather than dismissing September'​s repo turbulence as stemming from idiosyncratic events easily rectified by the Fed, we think that the event reveals broader vulnerabilities within the hidden plumbing of our financial system. Although not all institutional cash portfolios directly use repo, this squeeze should concern us all. We don'​t think there is a shortage of reserves per se, but we do believe that they have been rendered immobile by various financial regulations. Banks' reluctance to act as intermediate liquidity providers is further complicated by higher needs from non-​bank financial borrowers and the rising influence of MMFs. Before a long-​term solution can be found, institutional cash investors should reassess the liquidity structure in their cash portfolios and consider strategies to fund themselves in unforeseen situations." The article continues, "On the otherwise uneventful mornings of September 16 and 17, an unobtrusive part of the financial markets called repurchase agreements -- colloquially known as the repo market -- experienced these brush fires of sort when overnight interest rates briefly spiked as high as 10% from a starting point of around 2%. In response, the emergency crew, the Federal Reserve Bank of New York, sprang into action and injected liquidity into the financial system on multiple days to lower rates and calm market nerves. The Fed'​s decisive liquidity injection notwithstanding, one cannot help but wonder how the mundane repo market, often referred to as the '​plumbing' of the financial system, seized up without warning. Was it an isolated event or a symptom of something deeper and more troubling? The air of confidence exuded from Fed officials that the situation was easily contained contrasts with their cautionary measure of keeping the temporary liquidity option open beyond September quarter-​end. How should institutional cash investors process and understand this market '​anomaly' and be prepared for future unexpected liquidity events?" They add, "This paper will provide a brief recap of the September repo event and the relevant factors that caught the market off guard. We published a short blog on September 23 on this topic, and here, we plan to dig a little deeper to help chart a course of action to manage institutional cash portfolios."

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