So the Bank of England has decided to give its new-fangled biannual Money Market Liaison Group Sterling Money Market Survey (first launched in May 2011) more oomph.
No longer will the results sit, largely unnoticed, in one of the Bank’s quarterly bulletins. From now on the survey will be presented on a standalone basis, with its very own pdf and cover illustration, which looks like this: 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
Yale University’s Gary Gorton and Guillermo Ordoñez have a new working paper out on the role of collateral in financial crises. This may not pass for exciting news in some places but FT Alphaville is not like other places. Gorton is renowned for his work on shadow banking and wrote an excellent short primer on the recent crisis.
(Update: He’s also, as our commenters point out, the man behind some of the AIG’s risk-management models. Take that as you will, we still think there are some interesting insights in the paper.) Read more
The biggest US money market funds have slashed their exposure to Europe’s embattled banking sector to the lowest since at least 2006, the FT reports, underlining the spreading nervousness about the eurozone’s indebted periphery. The 10 largest US money market funds reduced their short-term lending to European banks to just $284.6bn by the end of August, or 42.1 per cent of their total assets, Fitch Ratings said in a report published on Thursday. That’s the lowest relative exposure since at least the second half of 2006, when Fitch’s records begin, and lower than the level reached during the nadir of the financial crisis. Since the end of June, these “prime” money market funds, which act as lubricants for the global financial system and invest mostly in highly-rated debt, have cut their European banking exposure by more than $55bn in absolute terms.
A little earlier we drew attention to this quote from the Wall Street Journal:
“We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . we hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore.” Read more
Overnight deposits at the European Central Bank reached a new high for the year Monday, reflecting new worries about the sovereign crisis and the end of the ECB’s monthly reserve period, the WSJ reports. Bank deposits reached €197.75bn ($270.5bn) Monday, ECB data showed Tuesday, surpassing the prior year high for 2011 of €181.788bn, recorded Friday. Deposit levels of above €100bn are considered to be a sign that banks are turning to the ECB as a safe haven because they are wary of lending to one another. Aside from market tensions, overnight deposits tend to rise toward the end of the ECB’s reserve period, which ends Tuesday, as banks store excess liquidity in the facility after meeting their own reserve requirements for the month, says the Wall Street Journal. The ECB’s all-time overnight deposit high of €384.3bn was reached in June 2010, driven by uncertainty about the then nascent debt crisis and an abundance of liquidity in the market as banks prepared to repay a 12-month ECB refinancing operation. Overnight deposits reached €297.4bn in November 2008, following the collapse of Lehman Brothers.
FT Alphaville just had a very interesting conversation with Ari Bergmann, managing principal at Penso Advisors, with respect to what’s been happening in the world of volatility hedging this year.
And specifically how things have changed since July. Read more
Investors pulled the most money from global stock funds since 2008 in the past week, Bloomberg reports. Funds that buy global equities suffered $3.5bn in net withdrawals in the week ending August 10, the most since the second week of October 2008, according data provider EPFR Global. Investors removed $11.7bn from funds that invest in US equities, the most since May 2010 when investors pulled money following a one-day market crash that briefly erased $862bn. Meanwhile leveraged loans had their worst showing last week since the financial crisis, the FT reports. Investors had put record amounts of cash into these investments over the past year, lured by their floating rate, when the expectation was that the economy would continue to improve and interest rates were likely to rise. Funds reduced bets on rising commodity prices by the most in any week since February 2010, Bloomberg says. In the week to August 9, speculators cut their net-long positions in 18 commodities by 19 per cent to 989,110 futures and options contracts, CFTC data show. Copper holdings plunged 61 per cent, the most since June 2010, and bullish gold bets fell to a five-week low. Meanwhile, money markets attracted net inflows of $49.8bn only a week after registering record outflows, in the FT. Equity funds had more money pulled out of them than at any time since early 2008, while investors moved faster out of risky junk-rated bonds than at any time since records began in 2005.
Bank deposits at the European Central Bank have more than doubled to a five-month high and European institutions are paying more for dollars, signs of concern that turmoil in eurozone bond markets could spread, the FT reports. The ECB said that banks deposited €104.9bn overnight on Tuesday, the highest level since early February and up from €49.9bn on Friday. The central bank pays below market rates, implying the jump means that banks are hoarding funds rather than lending to each other. A number of short-term funding markets were unnerved last week by the US debt ceiling drama but analysts said the jump in deposits pointed to more than that. “The moves we’ve seen in the past three days suggest this is nervousness based in the euro markets, not elsewhere,” said Simon Smith, chief economist at FXPro. In a further sign of dislocation in short-term funding markets, the rates European banks must pay for dollars have jumped.
Not good, not good at all.
From Morgan Stanley’s US rates team on Tuesday: Read more
Money market funds continued to pull billions of dollars worth of cash out of the market on Thursday. Nomura says investors took $9bn a day out of money funds this week, while the Investment Company Institute says $62bn has left the funds in the past two weeks, the WSJ reports. Companies and big financial institutions are beginning to rethink their view that Treasury notes are indistinguishable from cash, NYT DealBook says. Between Monday and Wednesday investors pulled $17bn from funds that invested only in government securities, compared with daily inflows of $280m for much of July, Crane Data said. Yields were rising too in the repo markets, from about three basis points on Monday to 17 on Thursday night, according to Credit Suisse.
That the European Central Bank has stepped in to replace much of the eurosystem liquidity that used to be provided by the banks’ themselves is well-known. Did you know, however, that one measure of the ECB’s liquidity provision is now higher than in the depths of the 2008 financial crisis? Read more
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. Read more
US commercial paper issuance has rebounded to its highest level in nearly two years as companies and banks take advantage of low interest rates, says the FT. While the market for short-term debt issuance has grown, it is unlikely to reclaim the heights seen in 2007, when reliance on such funding was a key element in fuelling the pre-crisis credit bubble. US issuance has risen to $1,227bn, according to the latest weekly data. However, Bloomberg adds that the European debt crisis could pose a threat to money market funds if a rash of sovereign defaults caused big banks to fail to meet obligations within the next three months. Zero Hedge asks if general collateral is the next ‘buck-breaking” source of frozen liquidity.
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 then deposit the cash received with the Federal Reserve overnight at 25bps, earning some 10bps. The FT has estimated that since late 2008, this risk-free arbitrage may have netted America’s banks as much as $200m in profits. Read more
China’s most important gauge of short-term funding costs has risen to a three-year high, illustrating the severity of the government’s monetary tightening and the stress it is placing on businesses, the FT reports. The country’s seven-day government bond repurchase rate is notoriously volatile and is expected to fall after a month-end cash shortage eases. But in jumping to its highest level since late 2007, this barometer of interbank liquidity has raised fresh questions about the extent to which China’s fight against inflation could undermine economic growth. The seven-day repurchase, or repo, rate, hit 8.9 per cent on Wednesday, up more than 500 basis points from its average in May. Analysts said regional and municipal banks were being hit hard, because they are net borrowers in the interbank market. See the chart on FT Alphaville.
The People’s Bank of China said it won’t sterilise its biweekly open market operation on Thursday, after money market rates more than doubled in the past six days alone.
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. Read more
And the slow drain of financial crisis support from formerly ‘TBTF‘ banks continues apace.
On Thursday, Moody’s announced it would be putting the credit ratings of Bank of America, Citigroup and Wells Fargo on review for downgrade after taking a closer look at incoming financial reform: Read more
US money market funds are struggling to make returns after short-term interest rates fell to record lows in the wake of regulatory changes and a big decline in Treasury bill issuance, the FT reports. The recent drop in rates has compounded the already low level of returns money market funds have made since the Federal Reserve set overnight rates in a band of zero to 0.25 per cent in December 2008. The low interest rate environment means a growing number of funds are losing business and coming under mounting pressure to consolidate. The Investment Companies Institute calculates that last year the industry waived $4.5bn of fees to maintain the fixed $1 per share net asset value of funds. See also FT Alphaville posts.
The repo rate normally trades closely to money market rates. This is sometimes referred to as the general collateral rate. But sometimes a particular security is in demand for borrowing purposes. This is because there are many dealers who have gone short of that security.
In this situation the cost of borrowing the security increases and depending on supply and demand conditions the repo rate can fall significantly. It can end up several percentage points beneath the prevailing money market rates. And in extreme situations a negative repo rate can occur. Read more
If you’re a money market fund manager, you’ll already be aware (plus possibly extremely concerned about) that general collateral rates are approaching zero. If you’re not, then read on.
As a reminder, the introduction of a new fee on banks in April by the US Federal Deposit Insurance Corporation sparked a slump in the government repo market, knocking that general collateral rate. Read more
Hundreds of billions of dollars invested in money market funds face almost zero returns after sharp falls in short-term interest rates, according to the FT. The key interest rate for funding trades in US Treasuries fell to a tiny fraction of 1 per cent on Monday. Nearly a third of the $2,750bn that sits in US money market funds is invested in the repurchase or repo sector, trading in which has been hit by a new charge levied on banks at the start of the month by the FDIC. The plunge in short-term interest rates, to just 0.01 per cent, is also due to the temporary absence of some Treasury securities, after wrangling in Washington over the US debt ceiling, that would help soak up excess cash. Reuters asks whether the repo reaction to the FDIC fee change is starting to fade, with some analysts predicting rates will stabilise.
The introduction of a new insurance charge on overnight borrowing by banks in the US has led to the collapse of a profitable arbitrage opportunity that financial groups have used to rebuild their balance sheets after the financial crisis, the FT reports, citing traders. The FDIC on Friday began levying the charge on funds borrowed by banks in the overnight money markets. Banks are now abandoning trades in which they borrowed in the overnight Fed funds market at about 10bp-15bp, then deposited the money at the Fed at an overnight rate of 25bp. Some dealers estimate these trades could have allowed banks to lock in profits of about $200m since late 2008, when the Fed began paying overnight interest of 25bp on excess reserves. Reuters adds that the FDIC charge has also sparked a squeeze on Treasuries collateral.
Another day, another high in Chinese money market rates:
Another day and another miserable session for the Chinese stock market, which fell 1.3 per cent overnight to a seven week low.
According to brokers it was this chart which spooked everyone: Read more
We knew it was coming.
But innovations to escape newly-created liquidity rules for banks have come rather sooner than we thought. Read more
Cast your minds back to August 2007, when money market funds were experiencing their first major crisis. It was far less sexy than what was to follow in September 2008 — when Reserve Primary notoriously broke the buck and sent money markets into panic — but it was one of the earlier manifestations of the credit crunch.
In 2007, as demand for Asset-Backed Commercial Paper (ACP) rapidly dissipated, the money market funds (MMFs) which invested in ABCP were rocked by credit and liquidity issues. Read more
Investors in loss-making money market funds are less likely to be bailed out by fund sponsors in the future, adding to the risks of a run on the $5,000bn sector, according to Moody’s, the ratings agency, reports the FT. In the absence of guaranteed government intervention, this could have a “destabilising” effect on financial markets, said Moody’s which calculated that, in the 2007-09 financial crisis, 62 money market funds – 36 in the US and 26 in Europe – were bailed out by their sponsor or parent company at a cost of at least $12.1bn, with one investment house handing over $2.9bn.