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’Carried away in Switzerland [updated]
Negative rates have arrived! In Switzerland, anyway.
Which means the risk of the Swiss franc becoming a funding currency for carry trade — à la the Japanese yen — is very real.
That said, volatility is still the issue.
Funding stress revisited
Yet more worries on Wednesday about the escalation of funding stress — this time from Nomura’s macro strategy team.
Like Morgan Stanley, it notes the rise in dollar funding costs (as displayed in the first chart below) through the FX basis market.
The unintended tightening
Not good, not good at all.
From Morgan Stanley’s US rates team on Tuesday:
The funding markets had been stressed previously in April-June 2010 due to risks associated with the sovereign debt crisis in Europe.
How much is this plain vanilla derivative in the window?
Just to be totally clear we’re talking plain vanilla derivatives like, say, interest rate swaps a bank might arrange on behalf of a company. But it seems they’ve taken on a more exotic flavour, of late.
Libor, repressed
From the annals of financial repression, we bring you Libor rates.
It’s a torrid tale of QE2, dollar funding and liquidity — and it’s one we thought we’d mention, given that the Federal Reserve’s second bout of quantitative easing has just come to an end.
Foreign banks are arbitraging the Fed, RBC says
Up until April this year, US banks had a nice little earner.
As Freakonomics explained, big banks were able to borrow cash from the Fed funds or repo market for say, 15 basis points, posting US Treasuries as collateral,
And all the liquidity in all the world…
Ongoing Greek turmoil. The end of QE2. Slowing growth. An oversupply of credit. A US default.
The list of current developments to keep investors up at night could go on.
No surprise then, that the dollar’s been rallying on the back of risk-reversal — a development which in itself could feed through to plenty of other asset classes.
For the love of Ronia (and repo)
It confusingly shares a name with a Staines minicab operator…
And a Swedish children’s book…
But this Ronia (short for Repurchase Overnight Index Average) is going to be very special in its own right. It’s a brand new repo-based rate for the UK interbank market,
The BoE and the bank funding gulf
There’s a lot to pick over in the Bank of England’s latest inflation report, out on Wednesday. (Full PDF here)
But not so much on inflation. Rather on bank funding relative to interest rates.
Here’s a chart which might well be the signal for tightening Bank Rate for the first time since the crisis.
From the Libor file
FT Alphaville loves documents sent in anonymous brown paper envelopes.
Here’s one we received Tuesday:
The envelope’s contents?
A 2008 paper by a group of academics (plus a Moody’s credit officer) that’s become suddenly re-relevant (new word) given the investigation into suspected Libor manipulation by a number of banks announced last week.
Libor fixings! UBS subpoenaed for interbank rate
Libor — the interbank rate set by, erm, the banks and curated by the British Bankers’ Association (BBA) — has not been without its critics in recent years.
And the creation of the rate has been also not been without scrutiny.
Kate and Wills disturb interbank markets
No really. Sort of. A little bit.
The British Bankers’ Association has amended its fixing calendar to take into account the public holiday scheduled for April 29, the day of the UK’s royal wedding.
Euro liquidity and the implications for cash-collateral
According to Bloomberg data, there’s been an interesting development in the euro swaps curve over the last week.
As can be seen below, the very front end of the curve has inverted ever so slightly:
A persistent inversion of this sort — we are told — usually reflects changing rate expectations,
The Swiss franc is as good as gold (literally)
We like watching correlations here at FT Alphaville.
And here’s a new one to add to the melting pot.
According to the FX strategy team at UBS, the Swiss franc is increasingly correlating with the price of gold — a relationship traditionally held (although inversely) with the dollar.
R.I.P. European unsecured lending
FT Alphaville has talked about the vaporisation of unsecured lending in Europe, as well as the consequent impact on quality collateral via the rush towards collateralised lending.
But in case you didn’t believe us,
Still stubbornly inverted
Joseph Abate at Barclays Capital sure loves a mystery.
Recently, he puzzled over why US GC repo rates were trading stubbornly higher than US unsecured rates…
But in his latest note, he points out that the Fed’s most recent balance sheet update not only fails to answer these questions — it also doesn’t explain surprising further shifts in the US repo market,
Looking for Ursa Major
Time for some more flashing warning signs, just in case anyone was getting bullish and considering catching a falling knife.
This time the signals are in Europe, where debt market stress is rising again,
In the land of two curves, and one price
Marco Bianchetti, a senior quantitative analyst in market risk management at Intesa Sanpaolo Bank, has a very intriguing piece out in this month’s Risk Magazine.
It’s highly technical, but the main point is that swap pricing has changed significantly since the beginning of the crisis,
Cliff-diving in European interbank rates
Ker-splash.
Those are some short-term liquidity rates — like European top-tier commercial paper — quite literally jumping off a stress-test cliff last week. Which is rather a step-change given that for the first few days after test results were announced some European interbank strains looked to have persisted.
Baseled and interBank
Is this the first rumbling of an unintended consequence in Basel III?
The Basel Committee released its watered-down vision of a new era in bank regulation, complete with liquidity buffers and leverage ratios,
Singing’ a liquid tune – banks tap €111.2bn from ECB six-day op
Results of the European Central Bank’s six-day fine-tuning operation are out.
And they are — €111.2bn allocated to 78 banks.
Markets had been looking for something €75bn-125bn at the op,
More please … the 12-month LTRO roll-over ain’t over yet
Relieved at the results of Wednesday’s three-month LTRO offer? Not so fast.
We’ve noted ad nauseum that lower-than-expected demand for the European Central Bank’s three-month Long-Term Refinancing Operation (LTRO) — on the eve of the expiry of its €442bn 12-month LTRO — could hide discrepancies between eurozone banks.
The cost of normalisation
So — the ECB’s 3-month liquidity operation saw less demand than expected on Wednesday. Approximately €132bn versus consensus expectations of some €250bn, to be exact, which left markets and the euro to rally after the announcement.
The not-so-big roll-over, banks take €132bn at ECB’s 3M LTRO
That’s very much below the consensus roll-over estimate of about €220bn – 250bn.
Which means (shock) eurozone banks are doing relatively alright, on the whole.
So, not with a bang, but a whimper come the results of the European Central Bank’s three-month Long-Term Refinancing Operation (LTRO) — the liquidity op meant to replace its €442bn 12-month LTRO,
Dollar signs and European bank stress
Whatever happened to the dollar funding crisis?
If you’ll remember — central banks restarted dollar swap lines in May, after fears of banks’ exposure to bad sovereign debt dried up liquidity in the market.
July 1 could be the day liquidity dies
We’ve mentioned July 1 a couple times before.
That’s the day the European Central Bank’s first and largest 12-month Long Term Refinancing Operation (LTRO) will run out. It’s also the day Barclays US money market analyst Joseph Abate expects three-month dollar Libor to start rising,
The price (and cost) of bank funding in Europe
More on the topic du jour for the banking sector — funding.
Citigroup says the issue isn’t so much the availability of capital — The Fed has after all, reopened its dollar swap lines and the European Central Bank seems likely to replace its expiring 12-month repo facility with more short-term liquidity — but cost.
Front-running money market fear
You are probably familiar with parallels between current money market stress and that experienced post the collapse of Lehman Brothers in 2008.
But there’s a key difference, as highlighted by the fixed income analysts at Deutsche Bank.