FT: Fed QE2 and repo market failures

Trading in the US mortgage market is being plagued by a record number of repurchase or repo failures due to the combination of low funding rates and the dominant role of the Federal Reserve, say dealers and economists.

Late last week, the most recent Fed data showed that the cumulative volume of mortgage fails by dealers rose by 11 per cent from the previous high in October to $1,230bn in November, while fails to dealers rose 12 per cent to $1,150bn.


In a repo fail, a promise to deliver a security on time to another investor is not kept, as the bonds cannot be borrowed and then lent back out. The shortage of mortgages that can be borrowed in the open market and alleviate fails reflects the massive buying undertaken by the Fed during its first round of quantitative easing...