It has become cliché that commentary continues toward the increasingly absurd at the expense of the obvious and all because Janet Yellen says there can’t possibly be anything wrong. The degree to which the broader markets agree in that sense has certainly lessened of late, but that only suggests the increasingly bizarre platitudes offered to do anything other than confirm suspicion. That counts even where, again, there is no doubt that “something” must be way off.

Interbank markets are supposed to be a hierarchy of risk and liquidity preferences. In very basic terms, you would expect to borrow at a lower rate in repo than either federal funds or LIBOR, both of the latter being unsecured unlike the former. If you bring collateral you pay less. Simple; neat; basic sense.

Historically, that has been the interbank hierarchy even under conditions of initial strain or transition. Throughout the rate hikes in the middle of the last decade, that pyramid prevailed. GC rates traded a few bps below (for the most part deviations were intermittent) effective federal funds while 1-month LIBOR was still upward yet (as was all LIBOR splayed out by maturity). Even after the events of August 2007, you would still find repo rates below federal funds and more and more underneath LIBOR.

Since December, that hasn’t been the case even intermittently. GC repo rates jumped to near and above the FOMC’s assumed money market “ceiling” and have remained there. Federal funds, the effective average rate, and LIBOR are both now persistently below repo rates. There is no way to suggest that is anything other than strain, fragmentation and/or disorder.

Worse, this shift in hierarchy traces back to a single event that the mainstream has also tried very hard to reduce to nothing – October 15, 2014. Prior to that “run” on UST’s, primarily, a “buying panic” of curiously the primary form of collateral, the familiar interbank format largely remained even at ZIRP. The repo rate would at times move above effective federal funds or even 1-month LIBOR in only the shortest bursts, but for the most part the left side on the chart above was the same as you would find in interbank construction pre-crisis (below).

After October 15, 2014, repo rates then began to trade above federal funds as if attracted to 1-month LIBOR instead – not 1-week LIBOR, either, a full month of term lending/borrowing. In fact, in many of the discrete episodes of liquidations (August 2015) or at least broad hints of disorder, repo rates would trade for lingering periods above 1-month LIBOR – and now they do not trade at any time below.