CNN Business/Matt Egan
Here we go again: Turmoil rocks the repo market

The repo market, a murky yet crucial corner of Wall Street, is acting weird again. And the turmoil suggests the Federal Reserve may need to come to the rescue once more.

The Dow, GameStop and bitcoin steal a lot of headlines, but the repo market is vital to the functioning of modern finance. Trillions of dollars of short-term loans, known as “repos,” are traded each day.

Normally, these trades happen in the background, with little fanfare. But every once in a while, the system breaks down, as it did in late 2019 and again a year ago. This is another one of those moments.

The rate to borrow 10-year Treasuries in the repo market plunged to minus-4% this week, a very rare occurrence. That means investors are essentially paying to borrow 10-year bonds, when normally it’s the other way around.

So why is this happening? It’s a symptom of uncertainty over how fast the US economy will recover, how long the Fed will keep its emergency policies in place and the vast amounts of debt Uncle Sam has piled on during the pandemic.

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Kitco/Anna Golubova
Another gold price spike ‘is coming’ – Barrick Gold CEO

There is an “over-exuberance” in the financial markets right now with investors piling into assets that don’t have any real value, said Barrick Gold CEO Mark Bristow, adding that gold price will see another spike higher.

During the COVID-19 pandemic, all the additional liquidity ended up going into the market, Bristow said during the Prospectors & Developers Association of Canada’s (PDAC) ‘Profits with a purpose’ conversation with BlackRock’s active equity group managing director Evy Hambro that Glencore’s Aline Cote hosted.

“It is similar to post-2008, where the market wished everything would go back to normal but didn’t know the full damage yet. The liquidity that was provided between 2009-11 was caught in the banks. This time around, it arrived at the market,” Bristow said.

One particular asset Bristow pointed to was cryptocurrencies and their quick ascent this year. “Everyone is so desperate. They are not sure how things are going to work. They are buying things that have no real inherent value in the market. We saw this over-exuberance in 2009-10 and then a major crash,” Bristow said.

These developments benefited gold and will support the precious metal once again, he added. “We saw a first spike in the gold price; there is another one coming,” Bristow said.

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Financial Times/Thushka Maharaj
Bond sell-off is a foretaste of things to come

For many in bond markets, the sell-off across fixed-income assets since the start of year might appear a bracing foretaste of things to come.

Markets are undergoing a pivotal shift. Where extraordinary support from central banks was a key driver for markets over the past nine months, economic fundamentals will take the lead this year. And bond market repricing sits at the nexus of this transition. 

The repricing has already begun. Long-term US government bonds have lost more than 12 per cent this year amid rising volatility in fixed-income markets. Stronger fiscal stimulus in the US is weighing heavily on the bond market. 

While the sharp rise in yields hints at disorderly repricing, we should remember that most of the rise has come from a repricing of higher growth expectations. This is a good thing. 

And it is hard to call current financial conditions tight. After taking into account inflation, real 10-year yields remain deeply negative. Assets more sensitive to swings in risk appetite seem, by and large, to be taking the bond volatility in their stride. So-called value stocks with low valuations have fared well while small-cap stocks are at or near their highs.

Even the Vix, the ultimate fear barometer, which measures investor expectations of equity market volatility, remains remarkably subdued. We can also expect verbal intervention from central banks to assuage markets should financial conditions start to tighten, which should smooth out volatility during this transition.

But this is not just about a few bad weeks for bondholders. The recent price action is a timely reminder of the challenges ahead for core fixed-income investors. As the global economy enters a new cycle, new risks are building. The prospect of sustained fiscal stimulus, rising inflation risks and diminished central bank support, collectively challenges the safe harbour that government bonds once provided.

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