September 17, 2019
The cost (interest rate) for swapping euros for dollars (for one week) in the global interbank market doubled overnight. This sounds like 2008 stuff. To curtail the dollar shortage, the Fed had to step in for the first time in about a decade, injecting about $50 billion into the short term market for dollars. This is effectively emergency QE, and has people speculating that the Fed will be forced to return to balance sheet expansion (i.e. QE4) — to replenish the dollars they have sucked out of the system via their balance sheet "normalization."
The repo bond market participants have explained away the squeeze in short term dollars as not a systemically threatening signal — just a confluence of events hitting at once (the Treasury raising dollars to fund budget shortfalls, and corporate tax payment date).
A systemically threatening event would certainly spike the VIX (i.e. downside protection seeking by the investment community). That didn't happen.
Instead, we head into tomorrow's Fed meeting (with expectation of a second quarter point cut for the year) with the VIX trading at a very tame level …