Hiding the wound

The financial pipes got a tempeorary fix yesterday. Banks used $50Bn in REPO to get the liquidity they needed to close the books for October, decreasing the need to tap other Banks through SOFR, pushing the rate down from 4.3% to 4%. As you can see on the chart below, is not common for banks to take that amount of money in the REPO market. In fact, it’s unusual, and typical of crisis, like COVID. Perhaps banks have dodged this bullet, but the problem is still there, whether is a combination of credit deterioration in their loan book and duration risk in their bond portfolios or something else, eventually, it will surface. At this point, banks are trying to hide the bleeding wound, hoping it will get fixed by rate cuts and time. We’ll see it’d it works.

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