Reply #55: BUT WAIT! THERE'S MORE! New Fee Shakes Up a Lending Market

[Demeter]

http://online.wsj.com/article/SB10001424052748703712504576242542837822736.html?mod=dist_smartbrief

The money market has been roiled by a sudden shortage of Treasury securities, another unintended consequence of government involvement in financial markets.

The disappearance of Treasurys in recent days has created a scramble among banks and investors, who depend on a fluid supply for short-term borrowing and lending. It is an unusual event, considering the market is generally awash in Treasurys, with about $9 trillion outstanding.

But recent rule changes mandated by the Dodd-Frank laws have made it too expensive for some banks to offer out their Treasurys holdings as part of a key overnight lending market known as the repurchase or "repo" market.

Banks typically borrow in this market, using Treasurys as collateral, parking the cash with the Federal Reserve and earning a better interest rate. Investors and money market funds use the market to lend out their cash overnight and earn a small return.

The lack of supply was so severe on Monday, and some investors so desperate for Treasurys, that they accepted negative yields—effectively paying to lend money to the banks. That is something that has rarely been seen since the financial crisis.

Exacerbating the problem, the Treasury has stopped selling some short-term Treasurys amid the debate in Washington over the government debt ceiling. At the same time, the Federal Reserve is suctioning up most of the new Treasurys that the government is selling, adding to the shortage of Treasury supply...