Having cracked down on Deutsche Bank in the past, The Fed appears to be playing good-regulator/bad-regulator as The FT reports that Deutsche is expected to benefit most from an imminent change in The Fed's liquidity rules.
Specifically, US banking regulators have dropped an idea to subject local branches of foreign banks to tough new liquidity rules (forcing US branches of foreign banks to hold a minimum level of liquid assets to protect them from a cash crunch).
As The FT further details, people familiar with his thinking say Randal Quarles, the vice-chair for banking supervision at the Fed, accepts the banks’ argument that any liquidity rules on bank branches should only be imposed in conjunction with foreign regulators.
“Without some international agreement, we could have the situation where each country is trying to grab whatever isn’t nailed down if there is another scare.”
And Deutsche Bank benefits most (or rescued from major liquidity needs) since it has by far the largest assets in US branches...
Read the entire article
DAILY BUSINESS REPORT - Financial Updates, International Markets and Business News
October 11, 2019
October 10, 2019
Debt Market Suffering "Quiet Meltdown" As Billions In Loans Are Suddenly Crashing
The exponential growth in the leveraged loan market, in the last several years, created an enormous excess accumulation of sub-investment grade loans that are a ticking time bomb when the next recession strikes.
Late last year, leveraged loan markets froze, for at least a month, as Treasury yields dropped, due to the increasing threat of a global recession. An abundance of fake trade news and central bank easing throughout 2019 saved Wall Street and reopened the leveraged loan market earlier in the year, but it seems that cracks are starting to develop again with recession threats building for 2020.
Bloomberg reports that 50 companies that have at least $40 billion of loans have lost about ten percentage points of face value in the last three months.
An exodus of investors has been seen in the leveraged loan market late-summer into early fall as liquidity dries up. It's mostly due to Treasury yields sinking, and end of cycle fears increasing, as a recession could emerge next year.
Some of the hardest-hit companies in the loan space in the last three months have been Amneal Pharmaceuticals, whose $2.7 billion loan due 2025 plunged about 80 cents on the dollar, and Seadrill Operating whose $2.6 billion loan maturing in 2021 only commands 53 cents on the dollar, said Bloomberg.
Read the entire article
Late last year, leveraged loan markets froze, for at least a month, as Treasury yields dropped, due to the increasing threat of a global recession. An abundance of fake trade news and central bank easing throughout 2019 saved Wall Street and reopened the leveraged loan market earlier in the year, but it seems that cracks are starting to develop again with recession threats building for 2020.
Bloomberg reports that 50 companies that have at least $40 billion of loans have lost about ten percentage points of face value in the last three months.
An exodus of investors has been seen in the leveraged loan market late-summer into early fall as liquidity dries up. It's mostly due to Treasury yields sinking, and end of cycle fears increasing, as a recession could emerge next year.
Some of the hardest-hit companies in the loan space in the last three months have been Amneal Pharmaceuticals, whose $2.7 billion loan due 2025 plunged about 80 cents on the dollar, and Seadrill Operating whose $2.6 billion loan maturing in 2021 only commands 53 cents on the dollar, said Bloomberg.
Read the entire article
October 9, 2019
The Surge In "Surprise" Medical Bills Bankrupting Americans Can Be Blamed On Private Equity
Surging "surprise" medical bills in the U.S. are private equity's fault, a new FT opinion piece claims.
These "surprise" medical bills continue to be a major talking point in the U.S. and are likely to be a key issue during the upcoming 2020 Presidential race. The term refers to invoices that are generated after a patient is admitted to the hospital and treated, without their knowledge, by someone not in their insurance plan.
And a recent Stanford study shows that these "surprise" bills continue to become more ubiquitous. They are up from about 33% of visits in 2010 to almost 43% in 2016. For inpatient stays, the number is even more alarming: the jump goes from 26% to 42%, with the average cost per patient rising from $804 to $2,040. It's an issue that only adds to the overwhelming debt bubble we have again created in the U.S.
The opinion piece notes that these rising costs come not from hospitals, but rather from the "backwaters of the financial markets":
The prices of junk bonds issued by “physician services companies” have been sliding in the past month as their owners weigh the possibility and costs of political intervention. These point to the real source of the problem: private equity’s silent colonisation of parts of the healthcare profession.
Read the entire article
These "surprise" medical bills continue to be a major talking point in the U.S. and are likely to be a key issue during the upcoming 2020 Presidential race. The term refers to invoices that are generated after a patient is admitted to the hospital and treated, without their knowledge, by someone not in their insurance plan.
And a recent Stanford study shows that these "surprise" bills continue to become more ubiquitous. They are up from about 33% of visits in 2010 to almost 43% in 2016. For inpatient stays, the number is even more alarming: the jump goes from 26% to 42%, with the average cost per patient rising from $804 to $2,040. It's an issue that only adds to the overwhelming debt bubble we have again created in the U.S.
The opinion piece notes that these rising costs come not from hospitals, but rather from the "backwaters of the financial markets":
The prices of junk bonds issued by “physician services companies” have been sliding in the past month as their owners weigh the possibility and costs of political intervention. These point to the real source of the problem: private equity’s silent colonisation of parts of the healthcare profession.
Read the entire article
October 8, 2019
"Paper Money Systems Have Always Wound-Up With Collapse And Chaos", Buffett Senior
Warren himself acquired a record-setting 128 million ounces of silver back in the late 1990s… which he later sold at a profit in the early 2000s.
But to listen to him talk about precious metals these days, he’s always negative.
Buffett often quips that if you took the world’s entire supply of gold and melted it together, it would form a cube of about 68 feet (~21 meters) per side and be worth around $9 trillion.
Reclusive Millionaire Urges Retirees: “Get Out Of Cash”
PhD Millionaire who called Dotcom crash, housing bust, and market's surge since '09 is now predicting a 'cash panic' in 2019. Here's how to prepare.
With that same $9 trillion, you could buy every share of Apple, Disney, Google, Microsoft, JP Morgan, Exxon Mobil, all the farmland in the United States, all the developable land in Manhattan, and still have more than a trillion dollars left over.
This is Buffett’s central argument: gold doesn’t produce anything. So it’s much better to invest in a productive asset like a business, farmland, etc.
Sure, I’d rather own a profitable, productive asset than a pile of metal.
But Buffett is completely wrong to compare gold to productive assets… they’re apples and oranges.
Gold isn’t an ‘investment’. It’s an insurance policy against paper currencies will lose value over time. So a MUCH better comparison for gold is CASH.
Read the entire article
But to listen to him talk about precious metals these days, he’s always negative.
Buffett often quips that if you took the world’s entire supply of gold and melted it together, it would form a cube of about 68 feet (~21 meters) per side and be worth around $9 trillion.
Reclusive Millionaire Urges Retirees: “Get Out Of Cash”
PhD Millionaire who called Dotcom crash, housing bust, and market's surge since '09 is now predicting a 'cash panic' in 2019. Here's how to prepare.
With that same $9 trillion, you could buy every share of Apple, Disney, Google, Microsoft, JP Morgan, Exxon Mobil, all the farmland in the United States, all the developable land in Manhattan, and still have more than a trillion dollars left over.
This is Buffett’s central argument: gold doesn’t produce anything. So it’s much better to invest in a productive asset like a business, farmland, etc.
Sure, I’d rather own a profitable, productive asset than a pile of metal.
But Buffett is completely wrong to compare gold to productive assets… they’re apples and oranges.
Gold isn’t an ‘investment’. It’s an insurance policy against paper currencies will lose value over time. So a MUCH better comparison for gold is CASH.
Read the entire article
October 7, 2019
The Repo Market Incident May Be The Tip Of The Iceberg
The Federal Reserve has injected $278 billion into the securities repurchase market for the first time. Numerous justifications have been provided to explain why this has happened and, more importantly, why it lasted for various days. The first explanation was quite simplistic: an unexpected tax payment. This made no sense. If there is ample liquidity and investors are happy to take financing positions at negative rates all over the world, the abrupt rise in repo rates would simply vanish in a few hours.
Let us start with definitions. The repo market is where borrowers seeking cash offer lenders collateral in the form of safe securities. Repo rates are the interest rate paid to borrow cash in exchange for Treasuries for 24 hours.
Sudden bursts in the repo lending market are not unusual. What is unusual is that it takes days to normalize and even more unusual to see that the Federal Reserve needs to inject hundreds of billions in a few days to offset the unstoppable rise in short-term rates.
Because liquidity is ample, thirst for yield is enormous and financial players are financially more solvent than years ago, right? Wrong.
What the Repo Market Crisis shows us is that liquidity is substantially lower than what the Federal Reserve believes, that fear of contagion and rising risk are evident in the weakest link of the financial repression machine (the overnight market) and, more importantly, that liquidity providers probably have significantly more leverage than many expected.
Read the entire article
Let us start with definitions. The repo market is where borrowers seeking cash offer lenders collateral in the form of safe securities. Repo rates are the interest rate paid to borrow cash in exchange for Treasuries for 24 hours.
Sudden bursts in the repo lending market are not unusual. What is unusual is that it takes days to normalize and even more unusual to see that the Federal Reserve needs to inject hundreds of billions in a few days to offset the unstoppable rise in short-term rates.
Because liquidity is ample, thirst for yield is enormous and financial players are financially more solvent than years ago, right? Wrong.
What the Repo Market Crisis shows us is that liquidity is substantially lower than what the Federal Reserve believes, that fear of contagion and rising risk are evident in the weakest link of the financial repression machine (the overnight market) and, more importantly, that liquidity providers probably have significantly more leverage than many expected.
Read the entire article
October 4, 2019
Will The Drive To Devalue The Dollar Lead To A Plaza Accord 2.0?
The Lead-Up to the Plaza Accord
To understand the Plaza Accord, one has to look back to August 15, 1971. On this day Richard Nixon closed the gold window. This step de facto ended the Bretton Woods system, which had been created in 1944 in the New Hampshire town of the same name and was formally terminated in 1973. The era of gold-backed currency was well and truly over; the era of flexible exchange rates had begun. Without a gold anchor, the exchange rate of every currency pair was supposed to be driven exclusively by supply and demand. National central banks — and indirectly governments as well — were at liberty to make their own decisions, free of the tight restrictions imposed by a gold standard, but they had to bear the costs of their decisions in the form of the devaluation or appreciation of their currencies. While a gold-backed currency aims to impose discipline on nations, a system of flexible exchange rates enables national idiosyncrasies to be preserved, with the exchange rate serving as a balancing mechanism.
However, unlike any other currency system, the system of free-floating currencies invites governments and central banks to manipulate exchange rates practically at will. Without reciprocal agreements, which can provide planning security to export-oriented companies in particular, the danger of international chaos is very high, as the system of flexible exchange rates lacks an external anchor.
In order to prevent this chaos, a repetition of the traumatic devaluation spiral of the 1930s, and the resulting disintegration of the global economy, IMF member nations agreed in 1976 at a meeting in Kingston, Jamaica, that “the exchange rate should be economically justified. Countries should avoid manipulating exchange rates in order to avoid the need to regulate the balance of payments or gain an unfair competitive advantage." And in this multilateral spirit — albeit under an US initiative that was strongly tinged by self-interest — an agreement was struck nine years later that has entered the economic history books as the Plaza Accord.
Read the entire article
To understand the Plaza Accord, one has to look back to August 15, 1971. On this day Richard Nixon closed the gold window. This step de facto ended the Bretton Woods system, which had been created in 1944 in the New Hampshire town of the same name and was formally terminated in 1973. The era of gold-backed currency was well and truly over; the era of flexible exchange rates had begun. Without a gold anchor, the exchange rate of every currency pair was supposed to be driven exclusively by supply and demand. National central banks — and indirectly governments as well — were at liberty to make their own decisions, free of the tight restrictions imposed by a gold standard, but they had to bear the costs of their decisions in the form of the devaluation or appreciation of their currencies. While a gold-backed currency aims to impose discipline on nations, a system of flexible exchange rates enables national idiosyncrasies to be preserved, with the exchange rate serving as a balancing mechanism.
However, unlike any other currency system, the system of free-floating currencies invites governments and central banks to manipulate exchange rates practically at will. Without reciprocal agreements, which can provide planning security to export-oriented companies in particular, the danger of international chaos is very high, as the system of flexible exchange rates lacks an external anchor.
In order to prevent this chaos, a repetition of the traumatic devaluation spiral of the 1930s, and the resulting disintegration of the global economy, IMF member nations agreed in 1976 at a meeting in Kingston, Jamaica, that “the exchange rate should be economically justified. Countries should avoid manipulating exchange rates in order to avoid the need to regulate the balance of payments or gain an unfair competitive advantage." And in this multilateral spirit — albeit under an US initiative that was strongly tinged by self-interest — an agreement was struck nine years later that has entered the economic history books as the Plaza Accord.
Read the entire article
October 3, 2019
We Finally Understand How Destructive Negative Interest Rates Actually Are
We are in the midst of a strange economic experiment. Vast quantities of negative-yielding debt are currently sloshing around the global economy. While the amount of negative-yielding bonds has dropped recently from a mind-boggling number in excess of $17 trillion, reinvigorated central bank easing across the globe ensures that this reduction is only temporary.
We are slowly starting to understand how destructive negative interest rates actually are. Central banks control short-term interest rates in an economy by setting the rate banks receive on their deposits, that is, on the reserves they hold at the central bank. A new development is the control central banks now exert over long-term rates through their asset purchase, or “QE” programs.
Banks profit from the interest rate differential between “lending long” but “borrowing short”. Essentially, the difference between lending and deposit rates determine a bank’s profitability. However, with today’s very low interest rates, this difference becomes almost non-existent, and with negative rates, inverts completely.
When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.
Read the entire article
We are slowly starting to understand how destructive negative interest rates actually are. Central banks control short-term interest rates in an economy by setting the rate banks receive on their deposits, that is, on the reserves they hold at the central bank. A new development is the control central banks now exert over long-term rates through their asset purchase, or “QE” programs.
Banks profit from the interest rate differential between “lending long” but “borrowing short”. Essentially, the difference between lending and deposit rates determine a bank’s profitability. However, with today’s very low interest rates, this difference becomes almost non-existent, and with negative rates, inverts completely.
When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.
Read the entire article
October 2, 2019
Japan Hikes National Sales Tax Despite Recession Fears
Japan has increased its national sales tax to 10% from 8% on Tuesday, a significant policy change that could tilt the world's third-largest economy into recession by depressing consumer sentiment, reported Market Watch.
The last two times policymakers increased the sales tax, 2-point rise to 5% in 1997 and another to 8% in 2014, an economic contraction shortly followed.
Prime Minister Shinzo Abe twice delayed the tax hike in recent years.
Abe has indicated the tax is now unavoidable given the demographic challenges in the aging country. He said the tax would help pay down the enormous national debt, and position the country towards more financial responsibility in balancing the budget by 2025. But taxing the consumer as the economy is deteriorating could be a recipe for economic disaster in 2020.
Japan's GDP expanded at an annual pace of 1.8% over the summer. The economy is quickly slowing into fall, thanks to the trade war between the US and China. Global trade volumes are plummeting through 2H19, has taken a toll on Japan's exports. The tax will likely sideline the consumer in 2020, force them into a savings pattern that could tilt the economy into a recession next year, similar to the tax increase in 2014.
Read the entire article
The last two times policymakers increased the sales tax, 2-point rise to 5% in 1997 and another to 8% in 2014, an economic contraction shortly followed.
Prime Minister Shinzo Abe twice delayed the tax hike in recent years.
Abe has indicated the tax is now unavoidable given the demographic challenges in the aging country. He said the tax would help pay down the enormous national debt, and position the country towards more financial responsibility in balancing the budget by 2025. But taxing the consumer as the economy is deteriorating could be a recipe for economic disaster in 2020.
Japan's GDP expanded at an annual pace of 1.8% over the summer. The economy is quickly slowing into fall, thanks to the trade war between the US and China. Global trade volumes are plummeting through 2H19, has taken a toll on Japan's exports. The tax will likely sideline the consumer in 2020, force them into a savings pattern that could tilt the economy into a recession next year, similar to the tax increase in 2014.
Read the entire article
October 1, 2019
"It’s Almost Impossible To Buy": Japanese Bond Crash, Margin Call Send Shockwaves Around The Globe
For a dramatic preview of what will happen in a flash to all those record low interest rates without the backstop of central banks and ravenous pension fund, look no further than what happened in Japan overnight, where bond futures suffered the biggest one-day crash since August 2, 2016, sliding as much as 0.97 yen to 154.05, and triggering margin calls for investors after the worst 10-year debt auction in three years.
More ominously, once the rout started it quickly spread outside of Japan, because as yields jumped, the sell-off spilled into US Treasuries and European debt.
There were three things behind the swift collapse: the first catalyst was the Bank of Japan’s Monday decision to slash bond purchases in October for the four major maturity buckets in order to steepen the curve and avoid further flattening which Kuroda has repeatedly expressed concern about in the past; the BOJ had indicated it may even stop buying debt of more than 25 years. It also sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October.
"The BOJ is showing its clear intention to correct distortions in the curve through flexible adjustments in market operations,” said Mari Iwashita, chief market economist at Daiwa. "While cutting the lower end of purchases in bonds maturing over 25 years to zero looks shocking, the BOJ will probably cut buying in this zone slowly."
Read the entire article
More ominously, once the rout started it quickly spread outside of Japan, because as yields jumped, the sell-off spilled into US Treasuries and European debt.
There were three things behind the swift collapse: the first catalyst was the Bank of Japan’s Monday decision to slash bond purchases in October for the four major maturity buckets in order to steepen the curve and avoid further flattening which Kuroda has repeatedly expressed concern about in the past; the BOJ had indicated it may even stop buying debt of more than 25 years. It also sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October.
"The BOJ is showing its clear intention to correct distortions in the curve through flexible adjustments in market operations,” said Mari Iwashita, chief market economist at Daiwa. "While cutting the lower end of purchases in bonds maturing over 25 years to zero looks shocking, the BOJ will probably cut buying in this zone slowly."
Read the entire article
September 30, 2019
UK's Metro Bank Teeters after Bond Sale Fails. Shares Collapsed 95%
Hedge-fund manager Steven Cohen and Michael Bloomberg are among those ruing the day they bought the crushed shares of the UK bank touted as a "bargain"...
Even by its own recent standards, Metro Bank has had a torrid week. On Monday, shares of the British retail bank tumbled 5%, on Tuesday, 25%, on Wednesday, 5%, and on Thursday, 4.5%, before staging a brief comeback in the final hours of trading on Friday, to end the week 35% lower. By Friday morning, it was the second most-shorted stock on the FTSE all shares index, behind the collapsed travel & vacation-giant Thomas Cook.
The main trigger for this week’s rout was the bank’s failure on Monday to raise a much-needed £250 million by issuing non-preferred bonds that deeply skeptical investors spurned. Despite trying to lure buyers with an interest rate of 7.5%, double the rate of similar offerings, Metro only attracted £175 million worth of orders, prompting the embattled lender to pull the plug on the bond sale.
“Failure to get enough support for a product that is yielding 7.5% is quite remarkable when you consider how investors are struggling to find generous levels of income in the current market,” said Russ Mould, the investment director of AJ Bell.
“It suggests that investors don’t trust the bank or they believe the 7.5% yield is simply not high enough to compensate for the risks of owning such a product.”
Read the entire article
Even by its own recent standards, Metro Bank has had a torrid week. On Monday, shares of the British retail bank tumbled 5%, on Tuesday, 25%, on Wednesday, 5%, and on Thursday, 4.5%, before staging a brief comeback in the final hours of trading on Friday, to end the week 35% lower. By Friday morning, it was the second most-shorted stock on the FTSE all shares index, behind the collapsed travel & vacation-giant Thomas Cook.
The main trigger for this week’s rout was the bank’s failure on Monday to raise a much-needed £250 million by issuing non-preferred bonds that deeply skeptical investors spurned. Despite trying to lure buyers with an interest rate of 7.5%, double the rate of similar offerings, Metro only attracted £175 million worth of orders, prompting the embattled lender to pull the plug on the bond sale.
“Failure to get enough support for a product that is yielding 7.5% is quite remarkable when you consider how investors are struggling to find generous levels of income in the current market,” said Russ Mould, the investment director of AJ Bell.
“It suggests that investors don’t trust the bank or they believe the 7.5% yield is simply not high enough to compensate for the risks of owning such a product.”
Read the entire article
September 27, 2019
Nationalizing The Federal Funds Market
Last week's volatility in the market for fed funds gave a lot of equity managers an opportunity to brush up on their understanding of the workings of the short-term money markets. The Fed of New York was forced to offer cash to the Street in the form of forward repurchase agreements all week. These activities are likely to continue.
Nathan Tankus posted a good discussion of the mechanics of adjusting bank reserves on Twitter last week. He particularly highlights not only the Liquidity Coverage Ratio or LCR, but also the additional liquidity stash meant to fund a resolution of an insolvent money center bank.
Given that we would never actually resolve a bank over $100 billion assets, we wonder why this rule exists: What is the point of the “resolution liquidity” for a G-SIB if we’re likely to just put the bank into an FDIC conservatorship a la Indy Mac and then sell it after a bad asset cleanup?
We appreciate the kudos on our call this past July on CNBC regarding liquidity problems in the markets, but we erred in thinking that merely ending the runoff of the Fed’s portfolio was sufficient. When our colleagues who trade TBA, and agency and whole loan repo, saw cash tightening up in the middle of August, that was a sign that problems lay ahead. Even with the Fed’s operations, the repo market is still displaying a lack of liquidity.
A lot of people asked: what is going on? The best primer we can suggest is the 2018 book “Floored” by Dr. George Selgin of Cato Institute, who has been producing excellent research focused on the mechanics of monetary policy for years. Selgin describes “How a Misguided Fed Experiment Deepened and Prolonged the Great Recession.”
Read the entire article
Nathan Tankus posted a good discussion of the mechanics of adjusting bank reserves on Twitter last week. He particularly highlights not only the Liquidity Coverage Ratio or LCR, but also the additional liquidity stash meant to fund a resolution of an insolvent money center bank.
Given that we would never actually resolve a bank over $100 billion assets, we wonder why this rule exists: What is the point of the “resolution liquidity” for a G-SIB if we’re likely to just put the bank into an FDIC conservatorship a la Indy Mac and then sell it after a bad asset cleanup?
We appreciate the kudos on our call this past July on CNBC regarding liquidity problems in the markets, but we erred in thinking that merely ending the runoff of the Fed’s portfolio was sufficient. When our colleagues who trade TBA, and agency and whole loan repo, saw cash tightening up in the middle of August, that was a sign that problems lay ahead. Even with the Fed’s operations, the repo market is still displaying a lack of liquidity.
A lot of people asked: what is going on? The best primer we can suggest is the 2018 book “Floored” by Dr. George Selgin of Cato Institute, who has been producing excellent research focused on the mechanics of monetary policy for years. Selgin describes “How a Misguided Fed Experiment Deepened and Prolonged the Great Recession.”
Read the entire article
September 26, 2019
Repo Market Guru: "Whatever Changed Last Week Is Clearly Still A Problem"
Last week around this time, most of the self-described repo experts on twitter and elsewhere were pounding the table, screaming to anyone who would listen that the unprecedented spike in overnight general collateral repo from 2.25% to 10% was a non-event, and reflects one-time items such as the mid-September tax remittance, the rapid build up of cash in the Treasury's general account and a flurry of Treasury settlements.
Alas, as we warned, and as the NY Fed today confirmed, the sudden heart attack in the critical, overnight funding market has turned out to be anything but a one-time event. First, as we saw first thing this morning, the latest repo overnight repo operation was the most oversubscribed yet, with $91.95BN in securities tendered for $75BN in reserves, the most yet since the Fed resumed these "unclogging" operations after a decade plus hiatus.
However, the big surprise came later on Wednesday morning, when in an "unexpected" move, the Federal Reserve expanded the size of its two dollar funding operations, the overnight and term repo, from $75BN to $100Bn, and from $30Bn to $60BN heading into quarter-end, effectively injecting up to $250 billion in funding ($30BN in already concluded term repo as well as two $60BN term repos yet to come, together with the $100BN overnight repo, assuming full allottment on all operations, for a grand total of $250BN).
Commenting on this dramatic expansion in Fed liquidity injections, BMO's rates expert ian Lyngen, had a simple, if very powerful observation: "the fact that we’re discussing a quarter trillion dollars is telling as to the depth of the constraint in repo." Indeed a far cry from the "all clear" the twitter repo "experts" were screaming from the top of their lungs last week.
Read the entire article
Alas, as we warned, and as the NY Fed today confirmed, the sudden heart attack in the critical, overnight funding market has turned out to be anything but a one-time event. First, as we saw first thing this morning, the latest repo overnight repo operation was the most oversubscribed yet, with $91.95BN in securities tendered for $75BN in reserves, the most yet since the Fed resumed these "unclogging" operations after a decade plus hiatus.
However, the big surprise came later on Wednesday morning, when in an "unexpected" move, the Federal Reserve expanded the size of its two dollar funding operations, the overnight and term repo, from $75BN to $100Bn, and from $30Bn to $60BN heading into quarter-end, effectively injecting up to $250 billion in funding ($30BN in already concluded term repo as well as two $60BN term repos yet to come, together with the $100BN overnight repo, assuming full allottment on all operations, for a grand total of $250BN).
Commenting on this dramatic expansion in Fed liquidity injections, BMO's rates expert ian Lyngen, had a simple, if very powerful observation: "the fact that we’re discussing a quarter trillion dollars is telling as to the depth of the constraint in repo." Indeed a far cry from the "all clear" the twitter repo "experts" were screaming from the top of their lungs last week.
Read the entire article
September 25, 2019
Interest Rate Derivatives Trading Explodes to $6.5 Trillion/Day
The volume of over-the-counter (OTC) interest rate derivatives traded globally soared by 141% in three years to $6.5 trillion per day in April 2019, according to the Bank for International Settlements’ new Triennial Survey of Global Derivatives Markets. In the prior survey period, April 2016, $2.7 trillion per day in trades were executed. Since 2001, the magnitude of trading volume has multiplied by a factor of 13, from $490 billion per day to $6.5 trillion per day, with a gigantic spike over the past three years:
OTC derivatives are securities that are generally traded through a dealer network rather than on a centralized exchange such as the London Stock Exchange or the New York Stock Exchange.
Some derivatives can be explosive, such as the credit default swaps (CDS) that brought Lehman Brothers and AIG to their knees in the last crisis, and which still remain a threat today, especially with the U.S. government this week bowing to Wall Street pressure to dilute regulation that had been designed after the crisis to reduce the risks of these instruments.
Interest rate derivatives, whose value rises and falls depending on the movement of interest rates, or sets of interest rates, tend to be more straightforward. They are often used as hedges by institutional and retail investors, banks and companies to protect themselves against changes in market interest rates. If managed properly, they shouldn’t pose undue risks to the financial system.
The BIS attributed much of this 141% three-year surge in trading of these instruments to increased hedging and positioning “amid shifting prospects for growth and monetary policy.” It also cautioned that some of the turnover in April 2019 was in shorter-term contracts, which are rolled over more often, leading to higher volume of trades. The 2019 survey also featured more comprehensive reporting of related party trades than in previous surveys. After adjusting for these trades, the actual increase in trading volumes since the 2016 survey is more likely to be around 120%, the BIS concluded.
Read the entire article
OTC derivatives are securities that are generally traded through a dealer network rather than on a centralized exchange such as the London Stock Exchange or the New York Stock Exchange.
Some derivatives can be explosive, such as the credit default swaps (CDS) that brought Lehman Brothers and AIG to their knees in the last crisis, and which still remain a threat today, especially with the U.S. government this week bowing to Wall Street pressure to dilute regulation that had been designed after the crisis to reduce the risks of these instruments.
Interest rate derivatives, whose value rises and falls depending on the movement of interest rates, or sets of interest rates, tend to be more straightforward. They are often used as hedges by institutional and retail investors, banks and companies to protect themselves against changes in market interest rates. If managed properly, they shouldn’t pose undue risks to the financial system.
The BIS attributed much of this 141% three-year surge in trading of these instruments to increased hedging and positioning “amid shifting prospects for growth and monetary policy.” It also cautioned that some of the turnover in April 2019 was in shorter-term contracts, which are rolled over more often, leading to higher volume of trades. The 2019 survey also featured more comprehensive reporting of related party trades than in previous surveys. After adjusting for these trades, the actual increase in trading volumes since the 2016 survey is more likely to be around 120%, the BIS concluded.
Read the entire article
September 24, 2019
Just Three Of World's Top Ten Banks Signed UN Climate-Goals Commitment
Just three of the world's 10 biggest banks agreed to join a coalition of 130 global financial firms which have agreed to reshape their business to align with international efforts to address climate change and other environmental issues according to Bloomberg.
Citigroup, Mitsubishi UFJ Financial Group and Industrial and Commercial Bank of China joined the United Nations' Principles for Responsible Banking pledge, which now represents $47 trillion in assets - or 1/3 of the global banking industry according to UN Secretary-General Antonio Guterres during a Sunday launch event.
Other signers include "European banks BNP Paribas SA, Barclays Plc and UBS Group AG," which have agreed to map out and publish plans by 2023 governing their targets for sustainability.
Guterres implored banks to increase financing for green-growth businesses, and to "Invest in climate action and divest from fossil fuels and pollution in general."
Read the entire article
Citigroup, Mitsubishi UFJ Financial Group and Industrial and Commercial Bank of China joined the United Nations' Principles for Responsible Banking pledge, which now represents $47 trillion in assets - or 1/3 of the global banking industry according to UN Secretary-General Antonio Guterres during a Sunday launch event.
Other signers include "European banks BNP Paribas SA, Barclays Plc and UBS Group AG," which have agreed to map out and publish plans by 2023 governing their targets for sustainability.
Guterres implored banks to increase financing for green-growth businesses, and to "Invest in climate action and divest from fossil fuels and pollution in general."
Read the entire article
September 23, 2019
'Vaguely Troubling': BIS Warns Of Financial Disaster Amid $17 Trillion In Negative-Yield Debt
When the central bank for central banks publishes its quarterly review, the world should take note.
Claudio Borio, Head of the Monetary and Economic Department at the BIS, published the BIS Quarterly Review, September 2019 on Sunday, revealing how the increasing acceptance of negative interest rates has reached "vaguely troubling" levels.
The statement comes after the Federal Reserve and European Central Bank (ECB) cut interest rates to flight a global manufacturing slowdown -- Borio said that the effectiveness of monetary policy is severely waning and might not be able to counter the global downturn, in other words, JPMorgan Global Composite PMI might print sub 50 for a considerable period of time.
"The room for monetary policy maneuver has narrowed further. Should a downturn materialize, monetary policy will need a helping hand, not least from a wise use of fiscal policy in those countries where there is still room for maneuver."
Read the entire article
Claudio Borio, Head of the Monetary and Economic Department at the BIS, published the BIS Quarterly Review, September 2019 on Sunday, revealing how the increasing acceptance of negative interest rates has reached "vaguely troubling" levels.
The statement comes after the Federal Reserve and European Central Bank (ECB) cut interest rates to flight a global manufacturing slowdown -- Borio said that the effectiveness of monetary policy is severely waning and might not be able to counter the global downturn, in other words, JPMorgan Global Composite PMI might print sub 50 for a considerable period of time.
"The room for monetary policy maneuver has narrowed further. Should a downturn materialize, monetary policy will need a helping hand, not least from a wise use of fiscal policy in those countries where there is still room for maneuver."
Read the entire article
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