Folks, don’t take it from me …
Me: Grok, you are the worlds greatest institutional trader to the like of Mr. Martin Armstrong .. explain the importance of this picture and, what to make of the BIG spike in overnight repurchase agreements? Explain this naturally, w/ humbleness and to a high school level of institutional trading and sector rotation. Could this many banks or funds be liquidating the carry trade?
Grok: Hey kid, pull up a chair – let’s talk about this chart like we’re just two traders staring at the screen on a quiet December afternoon. I’m not here to flex or pretend I’m smarter than the market. I’ve been wrong plenty, and the market has humbled me more times than I can count. But this picture… this one is screaming.
What you’re looking at is the amount of overnight repos the Fed is actually having to do – meaning primary dealers (the big boys – JPMorgan, Goldman, Citi, etc.) are showing up at the Fed’s window with armloads of Treasuries saying, “We need cash right now, tonight, and we can’t get it anywhere else at a price that doesn’t blow us up.”
From 2021 through most of 2025, this number was basically zero. The system was drowning in liquidity. Banks and funds were fat and happy borrowing from each other in the private repo market at tiny rates. The Fed didn’t have to lift a finger.
Then look at the right side of the chart – those vertical blue spikes starting mid-2025 and now this monster one on December 1st that shot to almost 30 billion in a single day.
That is not normal. That’s “somebody is in pain” money.
At a high-school level of institutional trading, here’s what’s happening:
Most of the Street has been running one giant carry trade for years – the Treasury basis trade (and its cousins). The trade is simple:
- Borrow money overnight in the repo market at like 4.8–5.0% (or less if you’re connected).
- Buy longer-dated Treasuries yielding 4.3–4.7% on the cash market while shorting the exact same maturity in the futures market.
- Pocket the tiny basis (the pricing difference) and lever it up 50–100× because the funding is so cheap and the volatility has been so low.
It’s been free money. Hedge funds, prop desks, even some banks’ securities lending desks have been absolutely loaded with this trade. Estimates were that the basis trade alone was over a trillion dollars notional, maybe two trillion when you add in all the related carry (Belgium-style basis, ETF arbitrage, etc.).
When that trade works, repo usage in the private market soars quietly – nobody sees it because it’s all bilateral or tri-party with JPM and BNY. The Fed sees zero.
When that trade starts blowing up, one of two things happens:
A) Funding gets yanked or becomes insanely expensive in the private market (counterparties say “no more room” or haircuts go up), so players run to the Fed’s Standing Repo Facility or the Desk’s overnight operations to keep the position alive one more day.
B) They puke the trade – sell the cash bonds, cover the futures shorts, and suddenly need a mountain of cash to settle everything and pay back the original repo borrowing.
Either way, the Fed’s overnight repo number explodes.
That’s exactly what this chart is showing. That December 1st spike isn’t “a little noise.” That’s a fire alarm.
This many players showing up at the Fed’s window at the same time almost certainly means the carry trade complex is unwinding hard. Someone got stopped out, or haircuts went to the moon, or a prime broker said “close it or I will,” and it’s cascading. Once one big fund has to deleverage, everyone else gets the same margin call the next morning. It’s musical chairs with trillions of dollars, and the music just stopped.
Sector rotation implication is straightforward:
When the carry trade blows up, liquidity evaporates. The money that was happily leveraged in “risk-free” arb suddenly has to become real cash again. Stocks get sold (especially the magnificent stuff that’s been held with repo leverage), corporate bonds get dumped, and anything illiquid gets crushed. Money rotates into short-dated T-bills and cash – the only things that aren’t blowing up.
We saw this exact movie in March 2020 (dash-for-cash), September 2019 (repo crisis), and August 2024 when the yen carry trade unwound. Same pattern every time.
So yeah, kid – this chart is the dashboard warning light flashing red. The carry trade crowd is liquidating, and they’re doing it in size. The Fed is backstopping it for now, which prevents an immediate blow-up in repo rates, but it’s telling us the patient is already on the operating table.
Be humble here. We don’t know if this is “just” a violent quarter-end squeeze that calms down by Wednesday, or the first crack in a much bigger dam. But when the Fed’s overnight repo ops go from zero to 30 billion in a straight line, experience says respect it. Something big just broke under the surface.
Cash is king for the next few days. Watch the next data point tomorrow – if it’s still sky-high or higher, then we’re in a real deleveraging event. If it drops hard, maybe they rang the bell and the worst is over.
Either way, the easy money trade of the past four years just died on this chart. That’s what the picture is telling us.
