In March we noted that the US Treasury had issued a request for information on who is holding large positions in the 2023 US Treasury note, following reports that the issue was experiencing repo difficulties. Not only was the issue trading in negative territory in the repo markets, there were reports of significant fails.
As ever with repo markets, information was scarce. Given the risk-on sentiment at the time, this seemed strange. Read more
GC repo rates and term (3-month and 6-month) GC futures have fallen in recent weeks. The only mystery is why it took so long.
A decline was largely expected as a result of TAG expiring and the end of Operation Twist. The former had given large risk-averse investors a safe place to stash their money, and the latter had allowed flooded dealer inventories with safe collateral against which slightly less risk-averse investors and MMFs could reverse repo and get a tad extra yield. Read more
Take note. This is an important observation from TD Securities, especially in light of all the talk that US Treasury/safe haven trades are dead in the water.
Our emphasis: Read more
Cast your mind back to the Valukas report into the collapse of Lehman Brothers. Back to Repo 105, and the immortal lines, “It’s basically window‐dressing. We are calling repos true sales based on legal technicalities.”
If it could be called a sale, it could be removed from the balance sheet whenever a reporting date — and inconvenient questions about leverage — threatened. Read more
Asset encumbrance ratios are becoming a fashionable metric when it comes to assessing the health of banks.
On that note, Société Générale’s cross-asset research group provides a nice little break-down on Monday. While SocGen don’t believe that asset encumbrance is a major problem for any bank yet, they do recognise that the issue is becoming important on account of banks’ recourse to secured funding, and one likely to be picked up on by ratings agencies soon. Read more
What we love about Bank of America Merrill Lynch’s ‘Liquid Insight’ team is that when they make calls on Treasuries and rates, they account for the impact of collateral markets and the repo effect — not to mention the general shortage of safe assets.
Take the following chart from their latest note: Read more
Read enough books and economics papers about the recent US financial crisis, and at some point you might notice something odd.
Most of them are about the factors that made the crisis and subsequent recession so profound and enduring — excess leverage, deregulation, lax lending standards, the rise of securitisation, blindness of the rating agencies, fraudulent bankers — but very few of them are about what actually started the crisis. Read more
US money market funds are still cautious about building up exposure to European banks.
However, according to Fitch’s latest Macro Credit Research report on Friday, they seem much more confident about building up exposure on secured terms. As a result, repos as a percentage of exposure to European banks is on the rise to new post-crisis levels: Read more
The European Repo Council’s latest survey on changing collateral trends in the bilateral repo market:
There seems to have been a modest shift out of core Eurozone collateral. Read more
Well, here’s one answer to a question we’d been wondering about since last week, when the ECB lowered the deposit rate from 0.25 per cent to zero.
We were curious to know whether some EUR-denominated investors would switch into USD short-term markets in a search for yield. Read more
A few things, actually — it’s not all Operation Twist.
Dealer holdings of US Treasuries have been climbing since the middle of last year, enlarging the pool of collateral for counterparties and coinciding with the rise in overnight repo rates: Read more
In my remarks today, I would like to share with you some concerns about the present state of the euro area money markets, which are characterised by segmentation between cash-rich and cash-poor banks and a fragmentation along national lines. I would also like to offer some thoughts on how proper money market functioning can be restored.
So starts a recent speech by Benoît Cœuré, member of the Executive Board of the ECB, which should be required reading for everyone interested in the fragmentation of the European money markets. Read more
An interesting passage from a recent CreditSights note on Goldman, following a meeting with the bank’s CFO, David Viniar (emphasis ours):
Lastly, Goldman explained that a further defense against a stressed funding situation driven by problems rolling over the repo book was what it referred to as its “secured funding excess.” Goldman noted that it raises repo funding in excess of current financing needs, in order to reduce its secured funding rollover risk. Read more
An excellent point from Don Smith at ICAP on Tuesday.
If you’ve looked at the eurozone FRA-OIS spread recently and wondered why it is so weirdly stable given that Grexit fears are hitting new extremes, there may be a very clear and technical explanation. One that could, as it turns out, be masking weightier problems in the money markets. Read more
As we discussed in Part 1 of this post, Manmohan Singh and Peter Stella believe the system is in the grips of a negative money multiplier effect, because banks have been depending too much on shadow banking for funding.
The Fed may even have inadvertently made things worse by intervening in more than just the illiquid security markets which shadow banks abandoned. Read more
Or, why hyperinflationists are wrong. And why everything you were ever taught about the money multiplier is not applicable to the here and now.
The following observation comes from a new VoxEu piece by Manmohan Singh and Peter Stella: Read more
If one article sums up how ETFs have come to change the market structure of the equity universe, it’s this one from Paul Amery at Index Universe on Thursday.
As he recounts, the thing that really worries regulators is the role ETFs play in the shadow banking world today. To what degree do their security deposits fund banks, and what sorts of maturity transformation is going on behind the scenes? Also, to what degree do ETF providers fulfil a credit intermediation role by transferring capital and liquidity from savers to borrowers, even when most ETF investors are unaware of the fact that their “deposits” may not be fully capitalised at all times? Read more
In the recent years, the financial crisis has led to a marked deterioration in European financial integration…
You might say that’s a statement of the obvious from the ECB’s latest report on financial integration in the eurozone. Read more
Just when you thought no more could be written about collateral, shadow banking and repo, Manmohan Singh and Peter Stella come together to bring us a new paper on the core essence of money and collateral.
The story so far: the world has been plagued by a shortage of safe collateral and an over-dependence on shadow-bank funding, all of which has led to a breakdown in repo markets and secured funding, which is having more of an effect on financial markets than many first anticipated. Read more
The Spanish bonds mini-crisis continues this week, so we thought we’d mention an excellent note penned by JPMorgan’s Flows & Liquidity team last week.
It touches on this theme of Spanish banks being less able to manoeuvre their balance sheets into more purchases of government debt. And on other oddities related to ECB liquidity ops… Read more
Thanks to Mario Draghi’s double installment of 3-year LTROs this year and last, it’s been a while since we’ve had to worry about dysfunctions in the European repo market. Indeed, it wasn’t that long ago that the market’s problems appeared fully contained. But, could we have spoken to soon?
News now comes to us of another case of “causation or correlation?” striking European bond markets. This time relating to Spanish collateral. Read more
Deposit insurance on non-interest bearing accounts — it was in October 2008 that the FDIC started it, through the Transaction Account Guarantee, or TAG.
Until we looked a bit more closely, we hadn’t guessed that the issue could offer much insight into the complexities of shadow banking regulation. Read more
A list of shadow-banking entities, as defined by the European Commssion in its latest green paper on shadow banking:
Fitch Ratings’ report on repo and shadow banking from February 3 has just been posted on the Fitch Ratings website — available to all who sign up for a login.
While its key themes were covered extensively by our FT colleagues back in February — namely that the use of lower-rated debt as collateral had returned to pre-crisis levels — one table buried deep in the report did catch our eye: Read more
First off, is sterilisation in the US even new?
As we’ve discussed before, the Fed’s interest on excess reserves (IOER) policy can and has been construed by many as a type of sterilisation policy in its own right. Read more
How much will be tapped at this month’s ECB three-year LTRO operation?
Estimates are increasingly being revised lower. Read more
(Chart via RBC.) Read more
From Icap’s latest repo weekly report:
ICMA’s European Repo Council has taken a look at the role of haircutting repo collateral in the current crisis on Wednesday. It’s decided that, overall, (and especially in Europe) there is little reason to believe the practice of discounting repo assets’ market value has had much of an impact.
This is mainly for two reasons, writes the reports author Richard Comotto. First, there is a lot of misunderstanding in the market as to how haircuts and margins actually work. Second, the practice in Europe is very different to that in the United States. Read more
Presenting, one of the best accounts of how the current crisis came about that we’ve read to date.
It comes courtesy of Benoît Cœuré, member of the executive board of the ECB, and should be required reading for every player in financial markets, if not every technocrat the world over. Read more