Category Archives: Bonds

And Again: The Fed Monetizes $4.1 Billion In Debt Sold Just Days Earlier

Over the past week, when looking at the details of the Fed’s ongoing QE4, we showed out (here and here) that the New York Fed was now actively purchasing T-Bills that had been issued just days earlier by the US Treasury. As a reminder, the Fed is prohibited from directly purchasing Treasurys at auction, as that is considered “monetization” and directly funding the US deficit, not to mention is tantamount to “Helicopter Money” and is frowned upon by Congress and established economists. However, insert a brief, 3-days interval between issuance and purchase… and suddenly nobody minds. As we summarized:

“for those saying the US may soon unleash helicopter money, and/or MMT, we have some ‘news’: helicopter money is already here, and the Fed is now actively monetizing debt the Treasury sold just days earlier using Dealers as a conduit… a “conduit” which is generously rewarded by the Fed’s market desk with its marked up purchase price. In other words, the Fed is already conducting Helicopter Money (and MMT) in all but name. As shown above, the Fed monetized T-Bills that were issued just three days earlier – and just because it is circumventing the one hurdle that prevents it from directly purchasing securities sold outright by the Treasury, the Fed is providing the Dealers that made this legal debt circle-jerk possible with millions in profits, even as the outcome is identical if merely offset by a few days”

So, predictably, fast forward to today when the Fed conducted its latest T-Bill POMO in which, as has been the case since early October, the NY Fed’s market desk purchased the maximum allowed in Bills, some $7.5 billion, out of $25.3 billion in submissions. What was more notable were the actual CUSIPs that were accepted by the Fed for purchase. And here, once again, we find just one particular issue that stuck out: TY5 (due Dec 31, 2020) which was the most active CUSIP, with $4.136BN purchased by the Fed, and TU3 (due Dec 3, 2020) of which $905MM was accepted.

Why is the highlighted CUSIP notable? Because as we just showed on Friday, the Fed – together with the Primary Dealers – appears to have developed a knack for monetizing, pardon, purchasing in the open market, bonds that were just issued. And sure enough, TY5 was sold just one week ago, on Monday, Dec 30, with the issue settling on Jan 2, just days before today’s POMO, and Dealers taking down $17.8 billion of the total issue…

… and just a few days later turning around and flipping the Bill back to the Fed in exchange for an unknown markup. Incidentally, today the Fed also purchased $615MM of CUSIP UB3 (which we profiled last Friday), which was also sold on Dec 30, and which the Fed purchased $5.245BN of last Friday, bringing the total purchases of this just issued T-Bill to nearly $6 billion in just three business days.

In keeping with this trend, the rest of the Bills most actively purchased by the Fed, i.e., TP4, TN9, TJ8, all represent the most recently auctioned off 52-week bills

… confirming once again that the Fed is now in the business of purchasing any and all Bills that have been sold most recently by the Treasury, which is – for all intents and purposes – debt monetization.

As we have consistently shown over the past week, these are not isolated incidents as a clear pattern has emerged – the Fed is now monetizing debt that was issued just days or weeks earlier, and it was allowed to do this just because the debt was held – however briefly – by Dealers, who are effectively inert entities mandated to bid for debt for which there is no buyside demand, it is not considered direct monetization of Treasurys. Of course, in reality monetization is precisely what it is, although since the definition of the Fed directly funding the US deficit is negated by one small temporal footnote, it’s enough for Powell to swear before Congress that he is not monetizing the debt.

Oh, and incidentally the fact that Dealers immediately flip their purchases back to the Fed is also another reason why NOT QE is precisely QE4, because the whole point of either exercise is not to reduce duration as the Fed claims, but to inject liquidity into the system, and whether the Fed does that by flipping coupons or Bills, the result is one and the same.

Source: ZeroHedge

Yield Curve Steepest In 14 Months: What Happens Next?

The Fed, reportedly, took action in 2019 – with its massive flip-flop, cutting rates drastically and expanding its balance sheet at the fastest pace since the financial crisis –  in order to ‘fix’ the yield curve which had dropped into the media-terrifying inverted state… but what investors (and The Fed) appear to have forgotten (or choose to ignore) is that it is now much more concerning.

The last few months have seen the yield curve steepen dramatically, up 35bps from August’s -5bps spread in 2s10s to over 30bps today – the steepest since October 2018…

Source: Bloomberg

That is great news, right? No more recession risk, right?

Wrong!

 

While investors buy stocks with both hands and feet, we take a look at how risk assets perform after the curve flattens and/or inverts. According to back tests from Goldman, while risky assets in general can have positive performance with a flat yield curve, risky asset performances tend to be lower. This is consistent with Goldman’s base case forecast combining low (but positive) returns from here given the lack of profit growth and a less favorable macro backdrop.

What is far more notable, as ZeroHedge showed most recently last July, is that since the mid-1980s, significant stock draw downs (i.e. market crashes) began only when term slope started steepening after being inverted.

And remember, the yield curve’s forecasting record since 1968 has been perfect: not only has each inversion been followed by a recession, but no recession has occurred in the absence of a prior yield-curve inversion. There’s even a strong correlation between the initial duration and depth of the curve inversion and the subsequent length and depth of the recession.

So, be careful what you wish for… and celebrate; because as history has shown, the un-inverting of the yield curve is when the recessions start and when the markets begin to reflect reality.

Source: ZeroHedge

World Economy Haunted by Risk Just Got a Double Shot in the Arm (How Long Before Mortgage Rates Rise??)

(Bloomberg) — Two of the biggest hurdles constraining the world economy have just been cleared.

Its a double shot of economic love!

Dogged for most of 2019 by trade tensions and political risk that hammered business confidence, the outlook for global growth will enter 2020 on a firmer footing after the U.S. and China struck a partial trade deal and outlook for Brexit cleared somewhat.

“The China trade deal and U.K. election result have taken out a major tail risk overhanging markets and companies,” said Ben Emons, managing director for global macro strategy at Medley Global Advisors in New York. “Business confidence should see a large boost that could see a restart of global investment, inventory rebuild and a resurgence of global trade volume.”

Like financial markets, most economists had factored in some kind of phase-one trade agreement between the world’s largest economies when projecting the world economy would stabilize into 2020 after a recession scare earlier this year.

But at a minimum, the agreement between President Donald Trump and President Xi Jinping means some of the more dire scenarios being contemplated just a few months ago now appear less likely. 

Bloomberg Economics estimated in June that the cost of the U.S.-China trade war could reach $1.2 trillion by 2021, with the impact spread across the Asian supply chain. That estimate was based on 25% tariffs on all U.S.-China trade and a 10% drop in stock markets.

Both the VIX and TYVIX are near historic lows.

With this bevy of good news, how long before residential mortgage rates rise??

Of course, forecasting is difficult … like forecasting your second wife.

Source: Confound Interest

“It’s About To Get Very Bad” – Repo Market Legend Predicts Dollar Funding Market Crash In Days

“No matter what the market does from now until year end, there is simply not enough cash and/or liquidity to allow the plumbing of the market to cross into 2020 without a crisis”

For the past decade, the name of Zoltan Pozsar has been among the most admired and respected on Wall Street: not only did the Hungarian lay the groundwork for our current understanding of the deposit-free shadow banking system – which has the often opaque and painfully complex short-term dollar funding and repo markets – at its core…

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… but he was also instrumental during his tenure at both the US Treasury and the New York Fed in laying the foundations of the modern repo market, orchestrating the response to the global financial crisis and the ensuing policy debate (as virtually nobody at the Fed knew more about repo at the time than Pozsar), serving as point person on market developments for Fed, Treasury and White House officials throughout the crisis (yes, Kashkari was just the figurehead); playing the key role in building the TALF to backstop the ABS market, and advising the former head of the Fed’s Markets Desk, Brian Sack, on just how the NY Fed should implement its various market interventions without disrupting and breaking the most important market of all: the multi-trillion repo market.

In short, when Pozsar speaks (or as the case may be, writes), people listen (and read).

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The Student Loan Bubble – Gambling With Your Future

(SchiffGold) Have you heard? The Democrats are going to fix the student loan mess! They’ve brought up the issue in almost every  Democratic Party presidential debate. All we need is a good government program and we can easily solve this $1.64 trillion problem.

Never mind that government programs caused the problem in the first place.

The student loan bubble continues to inflate. Student loan balances jumped by $32.9 billion in the third quarter this year, pushing total outstanding student loan debt to a new record. Student loan balances have grown by 5.1% year-on-year.

Over the last decade, student loan debt has grown by 120%.  Student loan balances now equal to 7.6% of GDP. That’s up from 5.1% in 2009. This despite the fact that college enrollment dropped by 7% between 2010 and 2017, with enrollment projected to remain flat.

In a nutshell, we have fewer students borrowing more money to finance their educations.

Before the government got involved, college wasn’t all that expensive. It was government policy that made it unaffordable. And not only did it manage to dramatically drive up the cost of a college education, but it also succeeded in destroying the value of that degree. Peter Schiff summed it up perfectly:

Before the government tried to solve this ‘problem,’ it really didn’t exist.”

Peter isn’t just spouting rhetoric. Actual studies have shown the influx of government-backed student loan money into the university system is directly linked to the surging cost of a college education.

Millions of Americans carrying this massive debt burden is a big enough problem in-and-of-itself. But it becomes an even more significant issue when you realize the American taxpayer is on the hook for most of this debt. Education Secretary Betsy Devos admitted that the spiraling level of student debt has “very real implications for our economy and our future.”

The student loan program is not only burying students in debt, it is also burying taxpayers and it’s stealing from future generations.”

This is yet another bubble created by government. Despite the campaign rhetoric coming out of the Democratic Party presidential primary debates, it seems highly unlikely Congress will do what is necessary to address the growing student loan bubble. And the Democrats’ solution seems to be to simply erase the debt – as if you can just make more than $1 trillion vanish without serious implications.

Like all bubbles, this one will eventually pop.

The bottom line is that the student debt bubble will ultimately impact US markets and average Americans.

Source: ZeroHedge

Fed Gives Up On Inflation, Welcome To The United States Of Japan

On Wednesday, the Fed cut rates for the third time this year, which was widely expected by the market.

What was not expected was the following statement.

I think we would need to see a really significant move up in inflation that’s persistent before we even consider raising rates to address inflation concerns.
– Jerome Powell 10/30/2019

The statement did not receive a lot of notoriety from the press, but this was the single most important statement from Federal Reserve Chairman Jerome Powell so far. In fact, we cannot remember a time in the last 30 years when a Fed Chairman has so clearly articulated such a strong desire for more inflation.

Why do we say that? Let’s dissect the bolded words in the quote for further clarification.

  • “really significant”– Powell is not only saying that they will allow a significant move up in inflation but going one better by adding the word significant.
  • “persistent”– Unlike the prior few Fed Chairman who claimed to be vigilant towards inflation, Powell is clearly telling us that he will not react to inflation that is not only well beyond a “really significant” leap from current levels, but a rate that lasts for a period of time.
  • “even consider”– If inflation is not only a really significant increase from current levels and stays at such levels for a while, they will only consider raising rates to fight inflation.

We are stunned by the choice of words Powell used to describe the Fed’s view on inflation. We are even more shocked that the markets or media are not making more of it.

Maybe, they are failing to focus on the three bolded sections. In fact, what they probably think they heard was: I think we would need to see a move up in inflation before we consider raising rates to address inflation concernsSuch a statement would have been more in line with traditional “Fed-speak.”

There is an other far more insidious message in Chairman Powell’s statement which should not be dismissed.

The Fed just acknowledged they are caught in a “liquidity trap.”

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Global Debt & Liquidity Crisis Update: Fed Injects $134BN In Liquidity, Term Repo Oversubscribed Amid Month-End Liquidity Panic

‘The volume of billions being lent into existence from nothing by the Fed to bail banks out will go parabolic. It must, otherwise credit will freeze, asset prices will fall, forced bank depositor bail-ins will ensue’

With stocks threatening to close in the red, late on Wednesday the Fed sparked a furious last hour rally…

… when in a statement published at 1515ET, precisely when the S&P ramp started, the New York Fed confirmed it would dramatically increase both its overnight and term liquidity provisions beginning tomorrow through November 14th.

The Desk has released an update to the schedule of repurchase agreement (repo) operations for the current monthly period.  Consistent with the most recent FOMC directive, to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation…

As we noted yesterday, that was a massive 60% increase in the overnight repo liquidity availability (from $75 billion to $120 billion) and a 28% jump in the term repo provision (from $35 billion to $45 billion).

“It’s just more evidence the Fed will not back off as year-end gets closer,” said Wells Fargo’s rates strategist, Mike Schumacher. “The Fed wants to take out more insurance. You had repo pick up last week. That might not have gone over too well.”

And now we know that there was good reason for that, because according to the latest, just concluded Term Repo operation, a whopping $62.15BN in securities were submitted to the Fed’s 14-day operation, ($47.55BN in TSYs, $14.6BN in MBS), resulting in a 1.38x oversubscribed term operation, the second consecutive oversubscription following Tuesday’s Term Repo, when $52.2BN in securities were submitted into the Fed’s then-$35BN operation.

This was the highest uptake of the Fed’s term repo operation since Sept 26.

But wait there’s more, because while the upsized term-repo saw the biggest (oversubscribed) uptake in one month, demand for the Fed’s overnight repo also soared, with dealers submitting 89.2BN in securities for the newly upsized, $120BN operation.

In total, between the $45BN term repo and the $89.2BN overnight repo, the Fed just injected a whopping $134.2BN in liquidity just to make sure the US banking system is stable. That, as the Fed’s balance sheet soared by $200BN in the past month rising to just shy of $4 trillion.

Meanwhile, funding tensions weren’t evident only in repo, but also in the Fed’s T-Bill POMO, where as we noted yesterday, demand for liquidity has also been increasing with every subsequent operation, peaking with yesterday’s operation.

Needless to say, if the funding shortage was getting better, none of this would be happening; instead it appears that with every passing day the liquidity shortage is getting worse, even as the Fed’s balance sheet is surging.

The only possible explanation, is someone really needed to lock in cash for month end (the maturity of the op is on Nov 7) which is when a “No Deal” Brexit may go live, and as a result one or more banks are bracing for the worst. The question, as before,  remains why: just what is the source of this unprecedented spike in liquidity needs in a system which already has $1.5 trillion in excess reserves? And while we await the answer, expect stocks to close pleasantly in the green as dealers transform their newly granted liquidity into bets on risk assets.

‘The powers that shouldn’t be would rather us experience a mad max world while they hide in luxury bunkers, than allow us a treasury issued gold backed currency, absent a central bank once again’

Source: ZeroHedge