EVM Theme: Fiscal > Monetary
It's time for an update. Thread incoming
It's time for an update. Thread incoming
I've closely watched dynamics of the debt ceiling fiascos because of the impact on funding markets. Resolution appears close at hand, and this has caught market off guard
Mnuchin says progress being made on debt limit deal, markets shouldn’t be concerned
cnbc.com
Mnuchin says progress being made on debt limit deal, markets shouldn’t be concerned
cnbc.com
The move in FRA/OIS has been swift as front end traders prepare for a deluge of Treasury issuance once the debt ceiling is raised
This is a TIGHTENING of funding driven by the ineptitude of fiscal policy. Is it any wonder why Fed is talking so dovish despite decent US data?
This is a TIGHTENING of funding driven by the ineptitude of fiscal policy. Is it any wonder why Fed is talking so dovish despite decent US data?
TBill supply held by Primary Dealers has turned NEGATIVE
BUT, Coupons held by PDs is still hovering at record highs
And cash in the Treasury General Account is declining rapidly as TBill supply declines.
Fiscal policy at work, reliquefying funding markets as that cash finds its way back into the market rather than sitting idle at the Fed
Fiscal policy at work, reliquefying funding markets as that cash finds its way back into the market rather than sitting idle at the Fed
As I've said before, SUPPLY MATTERS
All that paper sitting on the Primary Dealer balance sheets has to be funded in the repo market. Others have commented on "something," breaking in March 2018... nothing broke... Treasury supply pushed Repo > IOER
All that paper sitting on the Primary Dealer balance sheets has to be funded in the repo market. Others have commented on "something," breaking in March 2018... nothing broke... Treasury supply pushed Repo > IOER
This presented front end investors with a low risk higher yield product.
Cash left the Fed Funds market and migrated to Repo. This has been going on for over a year... but nobody began to pay attention until fed effective began to set > IOER
Cash left the Fed Funds market and migrated to Repo. This has been going on for over a year... but nobody began to pay attention until fed effective began to set > IOER
More recently, Fed effective has become totally unhinged... a rate that used to exhibit ZERO volatility now moves like a penny stock. Ok, so I'm being a bit dramatic, but this IS NOT supposed to be happening and the Fed certainly did not plan for this to happen
So who is in control of the Fed Funds rate at the moment?
I'd argue it's not the Fed, but rather Trump and Mnuchin. Fiscal policy is now the primary driver of the Fed effective rate.
Some are suggesting the Fed will just implement some type of repo facility
I'd argue it's not the Fed, but rather Trump and Mnuchin. Fiscal policy is now the primary driver of the Fed effective rate.
Some are suggesting the Fed will just implement some type of repo facility
but 1) such facilities take a long time to study and implement 2) the design isn't totally clear as there are unintended consequences they need to contend with if they were to implement such a facility
Where does that leave us?
1) I suspect the Fed may finally understand this and it's why they have bent over backwards to be dovish. They need to offset tightening of fiscal policy so expect more of the types of speeches we got today
1) I suspect the Fed may finally understand this and it's why they have bent over backwards to be dovish. They need to offset tightening of fiscal policy so expect more of the types of speeches we got today
2) Funding conditions are still likely to tighten into year end as issuance ramps up - resolution of the debt ceiling is the key. The Fed can cut, but Treasury supply will continue to apply upward pressure on repo
3) FRA/OIS for Dec (IMM2) is already quite wide, but early resolution of debt ceiling could push Sep (IMM1) wider as well
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