The Wall Street Journal (and Other Media) Should Stop Lying About Repos

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My patience has been exhausted.

By Wolf Richter for WOLF STREET.

On January 9, the Wall Street Journal ran an article about the Fed’s repo operations with this headline: “Fed Adds $83.1 Billion in Short-term Money to Markets.” This is what the headline looks like:

The article then said that the New York Fed “added $83.1 billion in temporary liquidity to financial markets Thursday….” And: “The liquidity came in two parts. There was an overnight repurchase agreement, or repo, that totaled $48.8 billion, and a $34.3 billion 14-day repo intervention.”

It said that this $83.1 billion that the Fed “added” on Thursday was up from $46.6 billion it had “added” on Wednesday (so $129.7 billion in two days???).

The WSJ and other media have published similar articles with similar headlines before. It’s part of a larger pattern.

But this WSJ headline & article are a lie about repos.

Neither in the headline nor anywhere in the body of the article does it explain that repos are in-and-out transactions. The headline and the text of the article only mention the “in,” but willfully ignore the “out.”

Here is the “in” of a repurchase agreement: The Fed buys securities (mostly Treasury securities and some agency mortgage-backed securities) in exchange for cash. This adds liquidity to the market.

Here is the “out” of a repurchase agreement: Every repo matures on a set date when the counterparties are obligated to buy the securities back from the Fed at a set price. At this point, the repo unwinds, and it drains liquidityfrom the market.

All repos are by definition in-and-out transactions. When a repo matures, the net goes back to zero (except for a tiny interest payment).

The Fed’s repos fall into two categories: “overnight” repos that mature the next business day; and “term” repos that mature on a specified date further in the future, such as 14 days.

Every business day, the previous day’s “overnight” repo matures. In a week without holidays, five overnight repos mature. Each time one of these repos matures, the original transaction unwinds, the Fed sells the securities back to the counterparties, and takes back in the cash it handed out, and this drains liquidity from the money market.

Every week, two or three term repos mature and unwind on the same principle, and drain liquidity from the market.

The WSJ’s headline and article willfully ignore this “out” part of the repo. The headline and article describe only the “in” part of the repos, the new repos – and not the repos that unwind at the same time.

Liquidity: the net of new repos minus matured repos.

The WSJ’s article was about the repos on January 9. This is what happened on January 9:

  • Fed added liquidity: +$48.83 billion new overnight repos (undersubscribed, of $120 billion offered by the Fed).
  • Fed added liquidity: +$34.3 billion new 14-day term repos (slightly undersubscribed of $35 billion offered).
  • Fed drained liquidity: -$46.6 billion overnight repos of January 8 unwound.

So on net, on January 9, the Fed added $36.5 billion, not $83.1 billion.

But repos are a daily in-and-out flow, that variously adds or drains liquidity. So for example, here is what happened the day before and the day after January 9:

On January 8, on net the Fed drained $46.1 billion:

  • Fed drained liquidity: -$63.9 billion overnight repos from January 7 unwound.
  • Fed drained liquidity: -$28.8 billion 15-day term repos from December 23 unwound.
  • Fed added liquidity: +$46.6 billion new overnight repos (undersubscribed).

On January 10, on net the Fed drained $8 billion:

  • Fed drained liquidity: -$48.83 billion overnight repos from January 9 unwound
  • Fed added liquidity: +$40.8 billion new overnight repos (undersubscribed).
  • There were no term repos.

Looking at the liquidity flows of those three days:

On January 8, the Fed drained $45.2 billion; on January 9, it added $36.5 billion; and today on January 10, it drained $8 billion. So, on net over those three days, the Fed drained $16.7 billion via its repo operations from the money market.

But there is no mention of these outflows of repos in the WSJ’s article. It only describes the inflows. The WSJ collectively and its reporters are smart. They know this – or at least the editors that pay attention know this. And so this is a willful misrepresentation of a very import factor in the market.

I suspect that this is an effort to manipulate readers and therefore the markets into thinking that the Fed is constantly and endlessly adding tens of billions of dollars in liquidity to the repo market every day, even as it may be draining liquidity from the repo market, and that these articles are designed to create shock-and-awe stockmarket hype.

But my patience with this type of article has been exhausted. I’m a subscriber of the WSJ, whose reporting I generally respect (and trust), and whose reporting I have cited many times. But this type of article is very unbecoming of the WSJ and throws serious doubt on the wisdom of my decision to subscribe.

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