FT Alphaville has tackled the issue of an explosion of settlement fails in US Treasury markets before, referencing how fails seem to balloon in times of crisis, such as the 2008 global financial crisis, when the incentive not to deliver owed-securities increases — a stealth form of financing in the view of some observers.
It’s precisely the sort of behaviour that the TPMG fails charge, introduced in May 2009, was supposed to nip in the bud by making it too costly to neglect to deliver a security. Yet, despite having quelled the number of UST fails when it was first introduced quite successfully, its capacity to serve as an effective fail deterrent seems to be slipping. Read more
From JPM’s Flows & Liquidity team, this is what ECB QE incontinence looks like:
The Liberty Street Economics blog of the Federal Reserve Bank of New York provided a good analysis this week of the summer’s UST settlement fails spike.
For those unfamiliar, settlement fails in US Treasury securities rose to their highest level in more than five years in June, with DTCC figures reaching more than $1.2 trillion in gross fails for the month:
Everyone in the market is suddenly talking about the spike in repo fails.
But here’s the thing. Repo fails need to be seen in context.
Yes, this chart from BoAML makes the recent June spike look significant:
A lot of people are puzzled over why US yields are falling when nothing has changed on the Fed communication side, and QE is supposed to be slowing.
Frances Coppola notes an even stranger phenomenon. When you look at the very big picture you realise that if there is a correlation between QE and rates, it’s actually a very counterintuitive one:
Every time QE is announced, yields rise: when it ends, they fall. And no, this doesn’t just affect the 10-year yield. The same basic shape can be observed on just about any maturity over 1 year (short-term rates are propped up by the positive IOER policy).
That’s from Nomura, do click to enlarge. They remain optimists even if they do think a solution will only come in the 11th hour: Read more
We’re a little late to this one but what the hell. Here’s an issue of super premium Treasuries maybe saving the day if the debt ceiling hits. Maybe. Read more
This piece of comparative calm is very definitely to be read in conjunction with Cardiff’s post on how the Treasury’s payment system (might) work.
It’s to do with the fact that there is no cross-default clause in US Treasuries. That means a missed payment on one bond would leave the other bonds unfazed, and equally usefully, if needed bonds can be split up into a ‘delayed component’ and a ‘normal component’ .
Pity the EM sovereign with such sloppy protections, eh? Read more
When it comes to understanding the Fed’s recently touted — but initially overlooked — fixed-rate, full-allotment overnight reverse repurchase agreement facility, Cardiff covered pretty much all the bases here.
That said, there was a great quote recently in a follow up piece with FT colleagues. Barclays’ Joseph Abate said the facility resembled an “all you can eat collateral buffet” due to the fact that the trade would provide a fully collateralised investment opportunity with the Fed to almost all parts of the financial market. Read more
An interesting point to ponder this weekend courtesy of Barclays’ Joseph Abate:
What is fed funds now measuring? Alternatively, there is a deeper question – does the fed funds rate accurately measure unsecured bank funding costs? After repeat rounds of asset purchases, bank reserves now exceed $2trn and all banks are massively long liquidity. No institution needs to borrow reserves in the market in order to satisfy its reserve requirements. So the only trades going through are originated from a handful of forced sellers who prefer to sell cash into the reserve market rather than leave it un-invested at the Federal Reserve for no return. And the volume of this activity is probably light as proportionally more of this cash is leaking into the repo market. Indeed, although there is no public information on the volume of daily fed funds transactions, based on several recent papers, we estimate that activity has shrunk from about $250bn/d before the financial crisis to probably less than $50bn/d currently. Read more
Tim Duy, professor of practice at the department of economics at the University of Oregon, is confusing Brad DeLong, professor of economics at Berkeley, with his observation that the Fed seems to be striving to change the mix but not the level of outright accommodation. This, at least, seems to be the motivation for taper talk.
We’re less confused, and quite like what Duy is saying.
Note the following (our emphasis): Read more
The conspiracy channels continue to make a big deal about the backwardation of gold — which is a situation in which gold prices for today are higher than for tomorrow. The thinking is that this must indicate rampant demand for physical gold.
In reality, since gold is a highly financialised commodity, the backwardation signal doesn’t actually indicate the bullishness they imply it does. Rather, it suggests something entirely different: that interest rates in conventional money markets are turning increasingly negative. Read more
It’s not perfect, we know. But the weekly CFTC derivative positioning report is still a useful barometer when it comes to gauging investor sentiment.
On which note here’s the breakdown of the latest report with respect to UST spec positioning, courtesy of TD Securities: Read more