Friday, December 31, 2010

FT: Basel III impacts small banks

...The Basel III reform package requires banks to hold enough easy-to-sell assets to weather a market crisis, thereby driving up the internal cost of business lines that tie up liquid assets, including payments services.

FT: 2.3bn liquidity gap for largest banks

FT: Fed extends central bank swap lines to August

...At present only $60m of the swap lines are in use but as much as $9.2bn was drawn down in May this year when stress on the European banking system was at a peak. Overall usage of the central bank swap lines peaked at the height of the financial crisis in December 2008 when foreign central banks drew on $583bn in dollar funding.

Thursday, December 30, 2010

FT: US Treasury yields on 2010

FT: yield spreads and the business cycle

US 2 year Treasury

...Since the Fed started buying, something odd has happened: the yield curve has flattened dramatically, reversing almost all of the August-November rise in the past month. The gap is still high, at 112bp, but bang in line with where it stood 18 months after the two previous recessions...

Yet, it is worth noting the tight link between the Fed funds target rate for overnight interest rates and the steepness of the yield curve. On this basis, perhaps the widening gap between 10-year and 30-year yields was simply down to talk of QE3, which improving economic data make less likely.

If past trends continue, the narrower gap suggests a rate rise in six months – when QE2 is due to end.

Tuesday, December 28, 2010

FT: ECB increases bond purchases

FT: UAE more conservative on Saudi loans

Bank of Finland: Central bank liquidity operations during the financial market and economic crisis

FT: Finnish study of central banks

...“central bank actions bear witness to … convergence rather than divergence,” argues the paper. The maturities of open market operations, for example, were extended by all central banks in the study (the RBA, ECB, SNB, Riksbank, BoJ, BoE, Fed and Bank of Canada) – many up to 12 months. All central banks expanded the list of assets accepted as collateral. Many broadened their range of counterparties. Swap lines were opened to aid liquidity. All central banks other than Canada and Sweden have started purchasing securities outright, vastly expanding their balance sheets...Central bank balance sheets as a proportion of GDP have roughly doubled...

Central banks now adopt explicit market-orientated goals, such as influencing long-term yields, improving liquidity, calming the markets and reducing risk premia.

FT: US housing prices to slide another 10% in 2011

Friday, December 24, 2010

Recent humour

Iceland is Europe's off shore bank.

Are you still trading with X?

The dot com crisis: you lose, go home, kick the dog, and have a scotch.

Financial dictionary terms

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.

counterparty risk. The risk that the other party in an agreement will default. In an option contract, the risk to the option buyer that the writer will not buy or sell the underlying as agreed. In general, counterparty risk can be reduced by having an organization with extremely good credit act as an intermediary between the two parties.

Off-the-Run Treasuries. Any set of U.S. Treasury securities of a certain maturity except for the one most recently issued. For example, if the Treasury issues one year notes in May, June, and July, and it is now August, the off-the-run Treasuries are those issued in May and June. Off-the-run Treasuries are less actively traded than on-the-run Treasuries and as a result have a slightly higher yield.

On-the-Run Treasuries. The most recently issued set of U.S. Treasury securities with a certain maturity. For example, if the Treasury issues one year notes in May, June, and July, and it is now August, the on-the-run Treasuries are those issued in July. On-the-run Treasuries are the most actively traded Treasury securities and as a result have a slightly lower yield than off-the-run Treasuries.

Tranche. One of several related securities offered at the same time. Tranches from the same offering usually have different risk, reward, and/or maturity characteristics.
• A class of bonds. Collateralized mortgage obligations are structured with several tranches of bonds that have various maturities.
• A part of an issue. A tranche sometimes refers to a single issue of a security released at different times. For example, a company may announce that is intends to issue $10,000,000 in bonds in two tranches of $5,000,000.
• Tranches are important to collateralized mortgage obligations, which are backed by pools of mortgages. These mortgages are arranged in tranches that mature at different times, for instance in 10 years, 15 years, and 30 years.Certain securities, such as collateralized mortgage obligations (CMOs), are made up of a number of classes, called tranches, that differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way.When the security is offered for sale, each of these tranches is sold separately.
• Similarly, a large certificate of deposit (CD) may be subdivided into smaller certificates for sale to individual investors. Each smaller certificate, or tranche, matures on the same date and pays the same rate of interest, but is worth a fraction of the total amount.
• A class of securities. Collateralized mortgage backed securities are usually divided into tranches according to seniority and risk.

Credit Default Swap. A swap in which the buyer makes a series of payments and, in exchange, receives a guarantee against default from the seller on a designated debt security. That is, the buyer transfers the risk that a debt security, such as a bond, will default to the seller, and the seller receives a series of fees for assuming this risk. In some ways, a credit default swap is like insurance, but there are significant differences. Prominently, the buyer of the credit default swap need not own the underlying debt security. Thus, the buyer may be speculating on the potential for default on the designated security. Likewise, the seller is not required to have the cash available to pay the buyer in case the designated security does default. This lack of regulation has raised concern, especially during the late 2000s credit crunch.

The carry of an asset is the return obtained from holding it (if positive), or the cost of holding it (if negative) (see also Cost of carry).
• For instance, commodities are usually negative carry assets, as they incur storage costs or may suffer from depreciation, but in some circumstances, commodities can be positive carry assets if the market is willing to pay a premium for its demand.
• This can also refer to a trade with more than one leg, where you earn the spread between borrowing a low carry asset and lending a high carry one.
• Carry trades are not arbitrages: pure arbitrages make money no matter what; carry trades make money only if nothing changes against the carry's favor.
• Interest rates/ For instance, the traditional income stream from commercial banks is to borrow cheap (at the low overnight rate, i.e., the rate at which they pay depositors) and lend expensive (at the long-term rate, which is usually higher than the short-term rate).This works with an upward-sloping yield curve, but it loses money if the curve becomes inverted. Many investment banks, such as Bear Stearns, have failed because they borrowed cheap short-term money to fund higher interest bearing long-term positions. When the long-term positions default, or the short-term interest rate rises too high (or there are simply no lenders), the bank cannot meet its short-term liabilities and goes under.
• The term carry trade without further modification refers to currency carry trade: investors borrow low-yielding currencies and lend (invest in) high-yielding currencies. It thought to correlate with global financial and exchange rate stability and retracts in use during global liquidity shortages,[2], but the carry trade is often blamed for rapid currency value collapse and appreciation.
- The risk in carry trading is that foreign exchange rates may change to the effect that the investor would have to pay back more expensive currency with less valuable currency.[3] In theory, according to uncovered interest rate parity, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency to rise against the high-interest-rate one. However, carry trades weaken the currency that is borrowed, because investors sell the borrowed money by converting it to other currencies.
- By early year 2007, it was estimated that some US$1 trillion may have been staked on the yen carry trade.[4] Since the mid-90's, the Bank of Japan has set Japanese interest rates at very low levels making it profitable to borrow Japanese yen to fund activities in other currencies.[5] These activities include subprime lending in the USA, and funding of emerging markets, especially BRIC countries and resource rich countries. The trade largely collapsed in 2008 particularly in regards to the yen.
- The 2008–2009 Icelandic financial crisis has among its origins the undisciplined use of the carry trade. Particular attention has been focused on the use of Euro denominated loans to purchase homes and other assets within Iceland. Most of these loans defaulted when the relative value of the Euro appreciated dramatically causing loan payment be unaffordable.

FT: $ carry trade anew?

MARKIT cds index

FT: widening basis between the Markit iTraxx Financials Senior and Subordinated indices

FT: Why part of the CDS market is stuck in time

Clearing also results in the removal of redundant trades, since all participants face the clearinghouse — this is one of the advantages of the clearing model. With compression and clearing, as well as a more general decrease in volumes seen across the market over the last few years, the gross notional outstanding of CDS is now $26,000bn. This figure is current as of December 17, 2010 and weekly updates are publicly available from DTCC here. The table below breaks this number down further:

Single names are for CDS that reference a single entity, e.g. Spain or Banco Santander; indices are tradable products that reference a group of entities, e.g. Markit iTraxx Europe or Markit CDX.NA.IG; and tranches reference certain slices of those indices with different risk profiles. While some tranches are standardised, in that they have set structures with standard attachment and detachment points referencing standard indices such as the Markit iTraxx, other tranches are bespoke, which is to say that they were tailor made to a given client’s specifications.

An issue that deserves attention, which was also discussed in a note by Citi a couple of weeks ago, is that a lot of bespoke and standard tranches that were printed from 2005 and 2007 are still out there. Furthermore, they are being actively hedged...

Monday, December 13, 2010

FT: US QE2 still on

...That does not mean QE2 is failing as long as rates are lower than they would be in its absence – and the Fed is confident that they are. The Fed always expected that, if QE2 were a success, then longer-term rates would rise rather than fall as investors anticipated an economic recovery...

What does make the Fed unhappy is any market belief that political attacks on QE2, mainly from Republicans in Congress, will reduce the amount of assets that it buys. Some officials think that a part of the rise in yields is due to this and that it is unjustified. The Fed endured worse attacks, they point out, when former chairman Paul Volcker raised rates to choke off inflation in the 1980s. It was not swayed...

Unless there is a big shift in the economic outlook, spring is the most likely time to change the $600bn number, or at least to clarify what comes next. The Fed will not keep markets guessing right up until the end of June, when the current round of purchases is due to finish.

FT: BIS data sets

There are several potential sources of variation in the numbers derived from the two datasets. First, the two reporting populations are not the same, as more banks report to the BIS consolidated banking statistics than took part in the CEBS stress testing exercise. Second, in their individual disclosures accompanying the publication of the stress test results, banks were allowed to deduct offsetting short positions (where the immediate counterparty was the same sovereign) from the gross exposures recorded on their trading book. This is generally not the case when banks report their positions for the BIS consolidated banking statistics. Third, the numbers disclosed as part of the CEBS stress testing exercise are on an immediate borrower basis. The BIS consolidated banking statistics contain data on both an immediate borrower basis and an ultimate risk basis, but the figures that are most often referred to in the context of sovereign debt exposures, including all of the public sector foreign claims numbers in this section of the BIS Quarterly Review, are on an ultimate risk basis. Fourth, the two datasets also differ in the levels of consolidation that they use in order to assign the holdings of various banking units across national jurisdictions…

FT: mechanics of capital flight

A cross-border payment between banks in two countries in the euro zone automatically generates balancing credit claims between the national central banks (NCB) and the ECB. This is the mechanism that irrevocably unifies the former national currencies, converting a set of currencies whose exchange rates are merely fixed at par into a single currency. But it also allows any of the euro-zone countries to draw vast credit from the rest of the euro-zone members via the ECB in the event of capital flight that arises from fears of default on sovereign debt, of systemic risks in the banking system, or even of the breakup of the euro itself. In this dimension, it is a mechanism that entwines the capital of the ECB in a default of any of the euro sovereigns.

FT: Rafi indices

This year an alternative has started to take off. California’s Research Affiliates created the idea in 2005 with its Rafi fundamental indices, and new indices which are not cap-weighted have since sprung up. Money tracking fundamental indices has almost doubled this year, to about $50bn, and the topic is on every big pension fund’s agenda.

Behind the new-found popularity of the indices is their trouncing of normal indexes. The FTSE Rafi US index stands out, having risen 39 per cent last year, against 26 per cent for the Wilshire 5000 actively traded US stocks. The 2009 performance was down to luck, rather than judgment, as it happened to rebalance in March, at the bottom of the market. But other years, and backtesting, suggest a return in developed markets a couple of percentage points ahead of cap-weighted indices.

The basic idea behind fundamental indices is that companies should be invested in according to their real world size, not their market value. That can be measured by earnings, dividends, revenues, or even employee numbers (Taiwan is about to launch a Rafi index based on staff numbers).

FT: 1994 bond market shock: review history

FT: gold silver trade in Hong Kong

FT: Growth and bond yields up

Forex – The US dollar was initially underpinned by higher bond yields after data on Friday showed US consumers were more upbeat on the economic outlook in early December and US exports in October rose to a two-year high.

However, a rally in the euro has pushed the dollar index, which tracks the buck against a basket of its peers, down 0.6 per cent to 79.62. Additional pressure was applied to the greenback after Moody’s said the US tax package currently being debated in Washington increases the likelihood of a negative outlook on the the country’s triple-A rating. The dollar is down 1 per cent versus the euro at $1.3336.


Rates – “Core” bond yields are continuing to move higher as growth hopes – and, for some, fiscal deficit worries – see investors dump sovereign debt. The yield on the US 10-year is up 3 basis points to 3.36 per cent, earlier hitting a seven-month peak of 3.395 per cent. Benchmark yields have risen nearly 100 basis points in just over two-months, even as the US Federal Reserve applies its $600bn bond purchase programme.

Wednesday, December 8, 2010

FT: bond market maker expands access

FT: US Treasury yields rise

Rates – US Treasuries are again lower, pushing 10-year yields up 13 basis points to 3.27 per cent, their highest level since mid-June. Wall Street research boutique Strategas says that the benchmark yield has now burst above its 200-day moving average and the “the next key level is 3.37%”.

The US will auction $21bn of 10-year notes later today. The yields at an auction of 3-year notes on Tuesday were at 0.862 per cent, almost 30 basis points above the previous auction a month ago.

Monday, December 6, 2010

FT: Bond funds outflow


Jan Loeys, chief global strategist at JPMorgan, said there had been slackening bond demand from several sources amid signs of stronger economic growth and rising interest rate expectations.

“Bond mutual funds have had three consecutive weeks of outflows, while Japanese investors and US banks have also been selling,” said Mr Loeys.

“We look for easy monetary policy, especially the Fed’s bond buying, to support bonds near term but expect higher yields further out.”

FT: Office of Financial Research (2)

FT: Office of Financial Research Dodds-Franck

FT: US QE2 > $600bn

FT: Juncker, Tremonti proposal for E-bond finance

FT: Euro funding arguments

...The German rejection leaves the European Central Bank’s aggressive purchase of eurozone sovereign debt as the main weapon for the EU...

The debate over additional measures began at the weekend, when Didier Reynders, the Belgian finance minister, expressed support for increasing the size of the €440bn bail-out fund.

Because of the fund’s complex rules, the amount available to lend to cash-strapped countries is far less than €440bn and Mr Reynders’ support follows similar signals from members of the ECB.

Mr Reynders’ comments were followed by the publication in the Financial Times of a proposal by Jean-Claude Juncker, the Luxembourg prime minister who chairs the 16-member eurogroup, and Giulio Tremonti, the Italian finance minister, proposing Eurobonds as a way to lower borrowing costs for peripheral economies.

Thursday, December 2, 2010

FT: new CFTC swap trade rules

Regulating derivatives was a central piece of the Dodd-Frank financial reforms passed in July as Congress sought to prevent a repeat of AIG, the insurance group bailed out after its sale of credit default swaps to Wall Street banks soured in 2008.

The law made the CFTC the nation’s leading regulator of the $583,000bn over-the-counter derivatives market.

The CFTC said that any company dealing swaps with a gross notional amount of $100m or more, dealing swaps to more than 15 counterparties, or entering into more than 20 swap deals in the course of a year would be considered a swap dealer.

Fed credit facility data/statement

FT: Fed statement on credit facilties

The Federal Reserve is committed to transparency and has previously provided extensive aggregate information on its facilities in weekly and monthly reports. As provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, transaction-level details now are posted from December 1, 2007, to July 21, 2010, in the following programs:

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)

Term Asset-Backed Securities Loan Facility (TALF)

Primary Dealer Credit Facility (PDCF)

Commercial Paper Funding Facility (CPFF)

Term Securities Lending Facility (TSLF)

TSLF Options Program (TOP)

Term Auction Facility (TAF)

Agency MBS purchases

Dollar liquidity swap lines with foreign central banks

Assistance to Bear Stearns, including Maiden Lane

Assistance to American International Group, including Maiden Lane II and III

Additionally, discount window and open market operation transactions after July 21, 2010, will be posted with a two-year lag.

The data made available Wednesday can be downloaded in multiple formats, including Excel, at The Excel files allow users to search, sort, and filter the data for each program in multiple categories. The site also provides explanations of each program as well as definitions for the data elements.

FT: Primary dealer credit facility report to Congress

Emergency facilities tapped

The Fed launched a variety of emergency lending facilities as traditional sources of liquidity dried up.

The agency mortgage-backed securities purchase program allowed banks to exchange MBS for cash. The term auction facility allowed deposit-taking banks to bid for 28-day and 84-day loans and was open to “generally sound” US institutions and overseas banks with a US branch. The primary dealer credit facility allowed lending to a range of institutions on an overnight basis in exchange for collateral. Dealers also tapped the term securities lending facility, swapping illiquid collateral for liquid treasuries in deals that lasted a month. The term asset-backed securities loan facility allowed any holder of securities backed by assets to swap them for a Fed loan minus a haircut.

FT: ECB liquidity continuance disappoints

The European Central Bank will delay the exit from emergency liquidity measures and keep buying government bonds in an effort to help relieve tensions in the eurozone bond markets.

ECB president Jean-Claude Trichet said the central bank will continue to offer unlimited loans to banks through the first quarter of next year as the eurozone debt crisis refuses to abate.

The central bank stopped short of announcing that it would step up its buying of eurozone government bonds as many market participants had hoped.

Wednesday, December 1, 2010

FT: peripheral country bonds

FT: Fed QE2 and repo market failures

Trading in the US mortgage market is being plagued by a record number of repurchase or repo failures due to the combination of low funding rates and the dominant role of the Federal Reserve, say dealers and economists.

Late last week, the most recent Fed data showed that the cumulative volume of mortgage fails by dealers rose by 11 per cent from the previous high in October to $1,230bn in November, while fails to dealers rose 12 per cent to $1,150bn.

In a repo fail, a promise to deliver a security on time to another investor is not kept, as the bonds cannot be borrowed and then lent back out. The shortage of mortgages that can be borrowed in the open market and alleviate fails reflects the massive buying undertaken by the Fed during its first round of quantitative easing...

FT: ECB bond buying

Comments late on Tuesday by Jean-Claude Trichet, European Central Bank president, that the ECB could step up its purchases of eurozone bonds have helped turn around sentiment, leading to a rally in European equity and sovereign debt markets.

Mr Trichet left open the possibility of the ECB significantly expanding its government bond purchases, warning markets not to underestimate Europe’s determination to resolve the escalating eurozone crisis. Some traders believe this could see the central bank announce an expanded bond buying remit on Thursday.

Prices of sovereign credit default swaps – a measure of the risks of a sovereign default – rallied strongly on the back of Mr Trichet’s comments. Five year CDS spreads fell 60 basis points to 484bp on Portugal and were 43bp lower on Spain trading at 322bp...

FT: local Chicago high frequency code trial

Wednesday, November 24, 2010

FT: October interim FOMC committee meeting

At the October 15 meeting, held by video conference, the Fed discussed whether it should target a long-term interest rate, suggesting this could be an option if inflation continued to fall in the face of the central bank’s new $600bn round of quantitative easing, nicknamed QE2. But the meeting rejected the policy change.

Targeting a long-term interest rate – fixing the 10-year yield at 2.5 per cent, for example – would commit the Fed to buying an unlimited amount of Treasury securities if the public wanted to sell them at that price. At the moment, the Fed can choose to buy more or less than $600bn, but with a long-term rate target it might lose control of the size of its balance sheet...

FOMC members slashed their growth and inflation forecasts for the next few years and sharply increased their expectations of unemployment.

In a crucial argument supporting the case for QE2, most of the FOMC forecast that core inflation in 2013 will be between 1.1 and 2 per cent. That justifies action because he Fed’s objective is ‘about 2 per cent or a bit below’.

The committee also expects to miss its other goal on jobs with unemployment forecast to be between 7.7 and 8.2 per cent at the end of 2012 – up from a June forecast of 7.1 to 7.5 per cent – and 6.9 to 7.4 per cent at the end of 2013.

A few committee members also increased their estimate of the number of people who will remain out of work once the economy has fully recovered.

The ‘central tendency’ estimate – which excludes the three highest and three lowest forecasts by individual FOMC members – rose from between 5 and 5.3 per cent to between 5 and 6 per cent.

Most FOMC members now expect growth of between 3 and 3.6 per cent in 2011 compared with the 3.5 to 4.2 per cent that they forecast in June, but they remain optimistic that growth will accelerate to about 4 per cent in 2012.

BEA QIII report

FT: revised QIII growth up, QE2 profits

Consumer spending up, revised GDP growth in QIII 2.5%

Consumer spending, which accounts for about 70 per cent of economic activity in the US, grew 2.8 per cent compared with the previous estimate of 2.6 per cent. That is the fastest such increase in four years and contributed 2 percentage points to the growth rate.

The revised data suggest that the summer slowdown in the US economy was not as severe as previously thought but growth is still not fast enough to bring down the 9.6 per cent unemployment rate...

Corp profits up 12.5%:

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New data released by the BEA also showed that while workers continue to struggle, corporations have bounced back from the recession. Corporate profits surpassed their peak level of four years ago during the third quarter to reach an all-time high of $1,659bn.

Profits have recovered rapidly as US companies benefit from cost cutting during the downturn and booming earnings from emerging markets. But they remain slightly below their peak as a share of GDP, at 12.5 per cent compared with the 12.8 per cent that they reached in 2006.

FED makes 62.4B in QE2
Profits earned by the Federal Reserve reached an all-time high of $62.4bn at an annualised rate in the third quarter even before the central bank began to expand its balance sheet further.

The Fed is making enormous profits because it earns more on the long-term bonds it buys as part of its quantitative easing programme than it pays to banks on their reserves. The Fed paid $35bn in profits across to the Treasury in the first half of this year.

Tuesday, November 16, 2010

FT: Fed defends monetary easing

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A group of Republican economists have also written an open letter to Fed chairman Ben Bernanke saying that the “planned asset purchases risk currency debasement and inflation”. Separately, countries from Brazil to Germany have attacked the policy as a ploy to weaken the dollar.

Fears that the heavy opposition could prompt the Fed to stop its asset purchases short of $600bn led to heavy selling of Treasury bonds on Monday. The yield on 10-year US Treasury notes rose above 2.9 per cent, returning to the levels of early August, before the Fed’s latest round of easing was priced in.

FT: QE2 toll

Monday, November 15, 2010

FT: fun with the financial crisis

FT: Shakeout with QE2, rates rise

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One explanation for the suddenness of the sell-off in Treasuries is that the market was almost completely one-sided owning bonds, because the Fed had already telegraphed QE2 well in advance.

“The easy answer is to say buy the rumour, sell the fact and, in this case, that’s what has happened,” says Michael Kastner, principal at Halyard Asset Management.

In other words, with QE2 priced in, the market responded by establishing a better balance between buyers and sellers. Indeed, it was not just Treasuries that have experienced a post-QE2 shakeout. The rise in bond yields late last week was accompanied by a sharp drop in commodity prices and a retreat in equities.

FT: US financial regulations

Tuesday, November 2, 2010

FT: QE2 in U.S.

...Supporters of QE have received a huge boost in recent weeks. Since Ben Bernanke, Fed chairman, delivered a pivotal speech to central bankers in Jackson Hole, Wyoming, on August 27 – which made markets believe QE2 would come – the degree to which yields on spread between yields on regular 10-year Treasury bonds exceed those of inflation-protected 10-year Treasury bonds (a proxy for inflation expectations) has risen from 1.6 to 2.1 percentage points. In addition, the trade-weighted dollar has fallen more than 4 per cent.

These moves show that markets believe QE2 is capable of moving asset prices, at least. Lower rates and a weaker dollar should stimulate the economy. Mr Bernanke and the Fed believe QE works by changing the balance of risks on offer to the private sector. By buying large numbers of risk-free long-term Treasury bonds, they think they can force the public either to pay more for similar bonds or to invest in something else...

Plan B would most likely be a change in communication – whereby, instead of trying to push down long-term interest rates, the Fed would try to push up expectations of future inflation.

It could do this either by promising to keep interest rates close to zero for a long time – regardless of what happens to inflation – or by adopting a “price-level target”. A price-level target is, in essence, a pledge to compensate for low inflation today with higher-than-target inflation in the future.

“Clearly communicating an ex­pected path for prices would help guide the public’s understanding of the Fed’s intentions while we carry a large balance sheet and promise continued low interest rates for an extended period,” said Charles Evans, the president of the Chicago Fed, in a recent speech.

Plan C would be a more extreme form of quantitative easing. Instead of targeting an amount of assets to buy, the Fed could target an interest rate – such as 2 per cent for the 10-year Treasury bond – by offering to buy as many bonds as needed to reach that rate. Mr Bernanke raised this option in a famous 2002 speech widely seen as the instruction manual for how a central bank should tackle deflation.

Buying an unlimited amount of bonds means losing control of the Fed’s balance sheet, however, so it is a deeply unpalatable option. But it is not as extreme or unpalatable as plan D: buying as many Treasury bonds as Congress needs to cut all taxes on payrolls to zero for a time.

Such a policy would be extremely risky. It would be conceivable only if the US was already mired in deflation. But its existence gives the lie to any claim that the Fed would be out of ammunition if QE2 did not work.

FT: bond bubbles, arguments

...But government bonds are, to him, much closer to “random walks” and he thinks he can predict their direction over only a few weeks.

“Government bonds are the most likely to switch direction with very little notice,” he says. “For corporate bond spreads, there is a little more time to become wise to likely moves.”

... Prospects for treasuries

QE2 ready to set sail towards historic lows

Investors expect that some $1,200bn in new US Treasury paper will be sold in the coming year, and that could be matched by purchases from the Federal Reserve and other central banks looking to keep their currencies lower against the dollar.

Consensus in the bond market about the size of this second round of “quantitative easing” to stimulate the economy is for the Fed to buy $100bn a month of Treasuries until core inflation starts rising and/or unemployment is falling. Whether this includes current Fed purchases of $30bn a month from reinvesting proceeds from its holdings of expiring mortgages remains to be seen, say traders.

The yield on 10-year Treasury notes sits at 2.65 per cent and is down from a high of 4 per cent in April. The benchmark yield is seen as falling towards 2 per cent once QE2 starts. That would eclipse its modern low of 2.04 per cent, set in December 2008 at the height of the financial crisis.

FT: Sovereign defaults unlikely

...Moody’s adds that worries that one of these countries may be forced to restructure or default has centred on their rising debt burdens. However, this is neither a necessary or sufficient condition for a sovereign default, the agency says.

The past 20 defaulters have also had high foreign currency exposure, an average of 76 per cent of total debt was in foreign currency before the default.

In the case of Greece, Portugal and Ireland, their debt is almost entirely in euros, their domestic currency, although a majority of their bonds are held by institutions in other eurozone countries.

Monday, November 1, 2010

FT: Strong Chinese and US data boost equities markets

FT: The Fed's QE2 this Wednesday. Nov 3

...Rather than a huge programme of asset purchases all announced up front, the Fed has made clear that it wants QE2 to evolve in size depending on the economic data. But it is still likely to make a downpayment by pledging at least some asset purchases on Wednesday: $500bn is a likely figure for this initial round of buying.

It will also set a buying speed. The Fed already has to buy $30bn of Treasuries a month in order to reinvest early repayments from its portfolio of mortgage-backed securities, so it is unlikely to want to buy more than a further $80bn-$100bn a month. If the initial figure were $500bn, it could therefore pledge to buy them over the next two quarters. Far more important, however, is what the Fed says about further purchases once the initial round is complete.

Tuesday, October 26, 2010

FT: the Darien scheme

The Darien scheme was dreamed up by the Scottish businessman William Paterson. He planned to found a Scottish colony at Darien on the narrow isthmus of Panama in Central America, to control trade between the two great oceans and so transform impoverished Scotland into a great trading nation. Thousands of ordinary people invested in the scheme; thousands elected to make the tough sea voyage and settle there as pioneers. But the plans ended in disaster.

“It’s generally thought it absorbed more than half of the national wealth of Scotland,” says Beaton. “They sent 14 ships in total and only one came back. Two thousand people died. Three huge factors were ignored. One was that the English could really put a spoke in it by putting an embargo on trade. Second, the climate was much, much worse than they had squared up to: conditions were terrible and 12 people were dying a day. Third, Paterson had wagered that the Spanish empire was waning and they had lost their chutzpah. And he was wrong.”

The downfall of the scheme crippled the Scottish economy and left the country demoralised, bankrupted and struggling to go forward as an independent nation. “The really significant thing about it in terms of British history is that it was a straight line from there to the Treaty of Union [leading to the joining in 1707 of Scotland to England in the single kingdom of Great Britain].”

...“It’s a story in its own right. But it’s also full of echoes for now. The idea that Scotland would overnight become a rich nation is a bit like what happened to Iceland ... [The economist] JK Galbraith wrote that one of the things that fuels every bubble is the belief that there’s a new device that makes everything safe. And the new device in the late 17th century was the joint stock company. It’s a very loose shorthand, but I think of it as the credit default swap of the era. People thought it had taken the risk away.”

FT: container ship industry older August article

Only 1.7 per cent of the world’s fleet is now laid up, according to Paris-based AXS-Alphaliner, a shipping consultancy.

Container shipsTwo of the most important forces in container shipping on Wednesday confirmed the strength and robustness of the recovery. Denmark’s AP Møller-Maersk, Maersk Line’s parent, announced it now expected 2010 to be its best year since 2004, when the container shipping boom was at its height.

Dubai’s DP World, one of the biggest container terminal operators, announced that container volumes grew by 7 per cent in the first half, while net profits, adjusted for the effects of exceptional gains, rose by 10 per cent.

The question is how long this unexpected recovery will last and what kind of container shipping industry will emerge.

FT: usinng Intex to analyze structured securities

...Although few outsiders have heard of it, the single most important language of mortgage-backed securities and similar products is a system called Intex. It includes a computer language for defining deals’ intricate cash flow rules, a graphics-based tool for designing deals, and a truly remarkable computerised “library” of the parameters of the underlying asset pools and the cash flow rules of more than 20,000 deals. Intex is not cheap – one user told me his bank pays about $1.5m a year for it – and it has competitors such as Bloomberg, but it is essential for all serious participants in structured securities...

FT: sugar price rises

...The changing shape of the global sugar market is one of the clearest examples of the shift towards emerging markets that is a common trend across commodity markets. Whereas a century ago London was the centre, the sugar trade is now dominated by the Bric countries: Brazil is the largest exporter, Russia the largest importer and India the largest consumer.

FT: negative rates on TIPS

Bonds and Rates
Yield Today's Change 1 Month Ago
US 2 Yr Bond

0.37% yield

+0.01 today's change
0.44% change i month ago
US 10 Yr Bond


US 30 Yr Bond


UK 2 Yr Gilt


UK 10 Yr Gilt


UK 30 Yr Gilt



Tuesday, October 19, 2010

China rate hike

Alloway: QE2 up to $2000bn by 2011

Oct 19 (Reuters) – Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday that further easing by the Fed has to be large enough to help boost demand, and purchases of $100 billion of securities a month would be a possibility.

“If we’re going to pursue another round of quantitative easing, it has to be a large enough number to make a difference,” Lockhart said in an interview on CNBC.

“As a monthly number ($100 billion) is fairly consistent with what we did before, and so I think it would certainly be in the range of numbers one might consider … but if you were talking about $100 billion as simply the overall program, I think that’s too small,” he said.

Wednesday, October 13, 2010

Andolini: Chinese $194bn reserves

The country’s reserves, already by far the largest in the world, increased by $194bn in the past three months to $2,650bn, eclipsing the previous record rise of $178bn in the second quarter of 2009.
Wolf: US will win global currency battle - Oct-12
Opinion: China’s unbalanced growth - Oct-07
Fears of China-US currency war overdone - Oct-12
Beijing targets banks to curb lending - Oct-12
Chinese economy shows signs of stabilising - Sep-12
Chinese economy wins manufacturing boost - Sep-01

The recent strengthening of the euro and yen against the US dollar explains some of the increase because China’s reserves are expressed in dollars but invested in a range of currencies and assets.

Buck: Palestinians open trade talks with Mercosur

Trade between the Palestinian territories and the four members of Mercosur – Brazil, Argentina, Uruguay and Paraguay – is minimal.

However, Abdel-Hafiz Nofal, the Palestinian deputy minister for national economy, said that the potential for improvement was significant, suggesting that trade flows could reach as much as $200m a year.

“Mercosur is one of the biggest economies in the world, and we believe that we should reach an agreement as soon as possible,” he added.

The Palestinians already enjoy preferential trade deals with a number of countries and blocs around the world, including the US, the European Union and Turkey.

Finalising a deal with Mercosur is regarded as promising because several Latin American countries boast large minorities with Arab or Palestinian roots.

Peak steel?

Or you will if you listen to Eiji Hayashida, chief executive of JFE Steel of Japan. The head of the world’s fifth biggest steelmaker told the FT that from around 2015 world steel output will reach a plateau for at least 5-10 years, driven both by resource constraints and a weakening in demand.

It is hardly the consensus view - but the idea is gaining ground.

waiting for QE

Tuesday, October 12, 2010

Blair: Ian Bremmer's boom in the night events: Iraq/Iran oil reserves...

Iraq produces 2.5m barrels per day, compared with Iran’s 3.7mbd. Mr Shahristani says that Iraq can achieve 12mbd by 2017, a level that would rival Saudi Arabia, but analysts are sceptical.

“We don’t believe that’s achievable,” says Patrick Gibson, oil supply analyst at Wood Mackenzie, a consultancy, adding that the main constraints are simply logistical. Iraq lacks the infrastructure and export facilities to make such a quantum leap.

But Mr Gibson says that 7.5mbd by 2017 is possible, while 5.3mbd is a “fully risked estimate”. Meanwhile, he added: “We don’t see Iranian production going anywhere in the next five years.”

On any view, Iraq will probably overtake Iran and become Opec’s second-biggest producer in the next five years. If so, Iraq’s status will have to change.

The country has not been subject to Opec’s production quotas since Saddam Hussein’s invasion of Kuwait in 1990. As Iraq’s output grows, this position will become untenable.

Dr Takin said the crucial moment will come when Iraqi output reaches 3.5 or 4mbd. “Then they will say to the Iraqi minister, ‘Your Excellency, the time has come for you to join our quotas. If you don’t, then prices will fall and we’ll all lose’."

Braithwaite: Trouble in dis-paradise, bank regulation prospects and issues

van Duyn: CDS poor predictors of risk

Mr Grossman said the most surprising result of the study was the high volatility in probability of default implied by CDS spreads.

The implied probability of default for bond insurers rose nearly 80 times from before the credit crisis to the peak levels during the crisis, while that for Reits rose nearly 30 times and the probability of default for banks and insurers and for homebuilders by about 15 times and 5 times respectively.

“Volatility in CDS spreads over the cycle translated into dramatic shifts in implied probability of defaults, reducing their usefulness as gauges of medium-term credit risk,” the report said

Google is taking over! The GPI...

Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics.

The work by Google’s chief economist, Hal Varian, highlights how economic data can be gathered far more rapidly using online sources. The official Consumer Price Index data are collected by hand from shops, and only published monthly with a time lag of several weeks...

While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.

Wednesday, September 29, 2010

OCC wins S&P clearing deal

The Options Clearing Corporation, the world’s biggest derivatives clearing organisation, announced a licensing deal on Monday with Standard & Poor’s, the index provider, to clear over-the-counter (OTC) options based on the S&P 500 index.

The landmark agreement will allow Chicago-based OCC to offer the first central clearing facility in the US for the $6,500bn OTC equity derivative market by next year. Equity indexes account for some $4,800bn of the OTC market, and the S&P 500 is thought to be the biggest single index product.

Basel III

At its 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders summit in November.

The Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011...

JP Morgan ponders the death of securitisation

Friday, September 24, 2010

Hedge funds reap rewards from Treasuries

Research by the National Bureau of Economic Research, the foremost economic think-tank in the US, says markets have been beset by “astonishing” pricing anomalies, the opportunities on which relative value arbitrage depends, since the collapse of Lehman Brothers in 2008.

“The arbitrages reported are stunning in magnitude and likely the largest ever documented in any fixed-income market,” says NBER – referring, specifically, to anomalies in US Treasuries, the world’s deepest and most liquid bond market...

The group’s most profitable trade was the startling anomaly in the Treasuries market identified by the NBER. The prices of inflation-linked Treasury bonds, known as Tips, and the prices of regular Treasury bonds – even when matched for maturity – were diverging sharply.

Since both securities had identical default risk profiles, there was no obvious reason for the divergence. Even once the effect of inflation expectations had been split out from the Tips yield, the bonds’ prices differed hugely.

For Barnegat the opportunity was clear: the fund bought Tips bonds and went short on regular Treasury bonds of a matched maturity, hedging out the effect of inflation along the way with a swap contract. The result was a trade that would make money if the divergent prices between the two securities converged.

Mackenzie: Bond markets vs QE2

Stopping the current disinflation trend and preventing deflation could entail a lot of bond purchases under QE2. In turn, there is the real risk of a substantial weakening in the world’s reserve currency, accompanied by a surge in dollar-denominated commodity prices. A weaker dollar should boost exports and will foster import price inflation for the US economy. That’s at odds with other central banks such as the Bank of Japan and those of emerging market countries, which want competitive currencies versus the dollar...

This places investors in a bind as it’s not wise to fight the Fed and central banks when they want something. But, mindful of the lessons from the mortgage bubble bursting in 2007, investors at some point will probably need to run for the exit from QE2, and fast.

Tri-party Repo Infrastructure Reform; The Federal Bank of New York, May 17 2010; Task Force on Tri-Party Repo Infrastructure; May 17 2010

Tett: on repo market reports

the repo market – or the part of finance where banks raise short-term loans backed by collateral – ... the total volume of so-called “tri-party repo contracts” – or those arranged via a third-party broker – in the US peaked at about $2,800bn in early 2008 and is now at about $1,700bn.

Wednesday, August 11, 2010

Jones: Hedge funds develop taste for US Treasury bonds

Hedge fund managers now account for one-fifth of all trading volume in the $10,000bn US Treasury bond market, up from just 3 per cent in 2009, according to a comprehensive investor survey by consultancy Greenwich Associates.

Trading in the once-sedate Treasuries market has spiked as volatility has increased and fund managers have scented opportunities to make large amounts of money from the uptick in government bond issuance and market anomalies caused by quantitative easing.

As well as bond trading “global macro” funds such as Brevan Howard, Tudor Investment Corporation and Moore Capital, which aim to profit from swings in global economic balances, the Treasuries market has seen an increase in fixed-income arbitrageurs.

Pricing inefficiencies have made the government bond market attractive for relative value trading, in which arbitrageurs bet that “anomalous” prices caused by an issuance glut will correct over time, according to traders...

Monday, August 9, 2010

Whiffen: Fed monetary moves implications for markets

...It is thought likely that the Fed will begin to reinvest repayment revenues from its holdings of mortgage-backed securities, thus halting the slow reduction in the level of quantitative easing. Plans for further stimulae may also be set out in the event that conditions deteriorate further...

Politi: Fed quantitative easing...

...The yield on two-year notes sits at a record low of 0.51 per cent, while five-year notes have dropped to 1.51 per cent from 2 per cent in mid-June. In the past month the bond market has moved to price in the first rate rise at the end of 2011, rather than next June. That has been accompanied by a sharply weaker dollar against big currencies, notably the Japanese yen.

“Although it is a fairly close call, we now expect the Federal Open Market Committee to announce that they will reinvest the paydown of MBS in the bond market at next Tuesday’s meeting,” said economists at Goldman Sachs, calling this a “baby-step” toward fully-fledged monetary easing late this year or in early 2011, involving asset purchases of at least $1,000bn and a “more ironclad” commitment to low interest rates...

Farchy: Dollar faces gathering headwinds

...In July, net inflows from foreign institutional investors into the Indian equity market totalled $3.8bn. The Korean and Taiwanese equity markets each received net inflows of more than $2bn last month. These flows have boosted the region’s currencies. The Singapore dollar is flirting with a record high, while the Indonesian rupiah and the Malaysian ringgit have risen to their highest in more than a year.

The conditions are building, too, for a return of the dollar “carry trade”, in which investors take advantage of low US borrowing costs to invest in higher-yielding assets elsewhere. Given the weaker outlook for the country’s economy, US interest rates are expected to stay on hold at least until late 2011. Hans Redeker, head of currency strategy at BNP Paribas, says his bank’s measure of “carry risk” has peaked, an auspicious signal for for carry traders.

In addition, Volatility has also fallen in the past two months, providing the stable conditions needed for a successful carry trade.

One dollar carry trade has involved buying Indonesian bonds. Foreign ownership of Indonesian bonds has risen to a record, while bond yields – which move inversely to prices – have fallen to record lows. Estimating the size of the dollar carry trade is an inexact science. Tim Lee at Pi Economics, a consultancy, says the dollar carry trade may now be worth more than $750bn, approaching the size of the yen carry trade at its peak in 2004-07. A revival of the carry trade would put further downward pressure on the US currency. In the short term, though, the currency’s direction is likely to be determined by the Fed’s action on Tuesday, with traders saying anything short of a move to ease policy further is likely to disappoint the market...

JonesL US hedge funds embrace the benefits of Ucits

Ucits, though, are the biggest thing in the hedge fund industry. Ostensibly a variety of European mutual fund, tightly regulated by EU laws, they have become the toast of London’s Mayfair and now New York.
In depth: Hedge funds - Jun-08
Paulson joins trend with launch of retail fund - Jul-21
Ucits catch on with US managers - Jun-06
Prop-hostile climate throws up tough calls for banks - Aug-03
Ucits brand threatened by growing complexity - Jul-11

Thanks to tweaks in the EU laws that created Ucits, hedge fund managers have discovered ways to repackage their strategies in Ucits form. In doing so, they have accessed retail and institutional investors who had been shut out of the high-octane hedge fund world.

“Ucits hedge funds now account for 7 per cent of the total hedge fund universe of $1,500bn but have attracted 20 per cent of the net inflows into the industry year-to-date,” according to Alexander Mearns, chief executive of Eurekahedge.

Hitherto, almost all Ucits start-ups have been European. But, as the accents in Monaco at the GAIM hedge fund conference this June attested, there are signs that is changing.

The attraction for US managers – as for European – is twofold. First, Ucits funds are to be exempt from the forthcoming AIFM directive, an EU law that threatens to freeze US managers out of Europe. Second, Ucits are a way for hedge funds to tap a vast institutional investor base.

Heise: Bond yields fall into abyss..

Bond markets have not only been ignoring all talk about inflation, but they are also absorbing quite a massive increase in the supply of government bonds in recent quarters. The fact that increasing supply is not depressing prices and pushing up interest rates is reminiscent of the Japanese experience, where standard economic theories have not given good guidance for some years. An obvious difference between Japanese government bonds and the US Treasury or German Bund markets is obviously that Japan actually experienced deflation for a number of years, which of course justifies low long-term bond yields.

Brittan: on central banks

Grant: Emerging markets lure big exchanges

This week Eurex, the derivatives arm of Deutsche Börse, and SGX, the Singapore exchange, said they would launch an Asian version of Euro Stoxx 50 index futures and options on futures – one of the German exchange’s flagship products.

It is the latest in a flurry of “cross-listing” deals struck in the past few months by Eurex and its main global rival, US-based CME Group, with exchanges in Malaysia, India, South Korea, Mexico and Brazil...

Cross-listings are designed to expand distribution of established exchanges’ core products beyond their time zones and to tap into communities of traders in other regions.

Masters: Bank regulators reach deal on liquidity

The The Basel Committee on Banking Supervision said on Monday that all but one of the 27 member countries had signed up to the new principles, which limit what banks can count as so-called tier-one capital – the only kind that can be counted on to absorb losses. The lone hold-out, said by people familiar with the situation to be Germany, said it would decide whether to sign on later this year.
Editorial: Basel must not yield to pressure - Jul-25
FDIC chief warns over capital standards - Jul-20
Finreg heralds a Great Escape for bankers - Jul-16
Basel bank capital buffer plan unveiled - Jul-16
Lex: Achieving closure - Jul-16
In depth: US banks - Jun-14

... The real effect will depend on the committee’s next decision, due this autumn, which is to set the minimum required ratio of tier-one capital to risk-weighted assets. The higher the ratio, the bigger the expected impact.

The committee delayed several of its more innovative proposals. For example, the planned “net stable funding ratio”, a first-of-its-kind liquidity rule that requires banks to match the duration of their liabilities and assets more closely, will be in an “observation phase” until at least 2018 and may be modified substantially.

The committee also is taking a deliberate approach in imposing a new leverage ratio designed to prevent banks from using off-balance-sheet vehicles and risk-weighting methods to hide the true size of their balance sheets. The new rule, which would require banks to hold tier-one capital equal to 3 per cent of unweighted assets, will be in a test phase until the end of 2017.

Jenkins: stress test results 'underwhelming'

“Stress tests should help, but are not such a game changer,” said Morgan Stanley. “The CEBS stress test result is of limited value to us, as expected by the market,” said JPMorgan. Others agreed. For all Committee of European Banking Supervisors’ protestations, the market’s view is that the parameters of the stress test, particularly using headline tier one capital, rather than the higher quality core tier one number, and its headline results – only 7 out of 91 failing with a €3.5bn ($4.6bn) capital deficit – were “underwhelming”, to cite Citigroup.

Jenkins: Euro stress tests

Two months on and European markets are still jittery over the prospects for the continent’s banking industry. But this morning, when the markets open, optimists believe a new calm will envelop the sector, following the publication late on Friday of a comprehensive exercise to stress-test 91 of Europe’s biggest banks. Only seven – all of them at least partly public sector – failed, with a combined capital shortfall of just €3.5bn, a result that regulators insist is a tense meeting with Wolfgang Schäuble, Germany’s finance minister, Mr Geithner not only discussed broad policy issues around deficits and financial regulation. This was where the American’s hectoring two-month campaign began to persuade Europe to follow the US example of a year ago and carry out a transparent, comprehensive banking sector stress test.

“There was market pressure and there was pressure from the US,” recalls one top French banker. “Tim Geithner pushed a lot to get this more transparent. His view was, ‘just get money on the table and provide transparency’.”

Thursday, August 5, 2010

Armenian Karabagh rug

Dated: 1901, inscription. 3.5' by 5.9

Sunday, July 25, 2010

Harding: Fed to shift policy if recovery stalls

Trichet: Stimulate no more – it is now time for all to tighten

Mackenzie, Duyn: Volatility gauges suggest trouble is brewing

More than six months ahead, investors are signalling severe caution, with the gap between current and future measures of equity volatility widening to a record. This also signals illiquidity in these parts of the derivatives markets – there are few traders wanting to bet future volatility will fall – causing prices to surge...

Tett: Time for true debate on Fannie and Freddie

It remains to be seen whether any of this gets beyond political posturing. However, judging from a consultation exercise now being organised by the US Treasury, there are some interesting ideas floating around. These essentially fall into two camps. Parts of the Republican party – and some private sector banks – want to remove the state subsidy for the GSE altogether. One idea submitted to the Treasury, for example, calls for banks to organise a mutual, private sector insurance scheme to guarantee mortgages, without state support.

However, a second strand of ideas calls for the state subsidy to be maintained, both to ensure stability in the short term – and to guarantee that the mortgage market remains liquid and homogenous in the long term. Sifma, the banking lobby group, for example, says that it is crucial to maintain the so-called “to be announced” sector, to give the market depth...

US Senate passes financial reform

Meyer, Duyn: CFTC to formulate rules on derivatives

Meyer: Commodities demand stays robust

Blas: Policymakers need new commodities roadmap

Grant et al: Chicago traders launch new derivatives exchange

Five Chicago-based trading firms have joined forces with CME Group, the US futures exchange, to launch a new exchange that will offer trading in interest rate swap derivatives closely modelled on current over-the-counter (OTC) rate swaps, people familiar with the matter said.

The new venture, called Eris Exchange, is designed to take advantage of the rapidly shifting competitive landscape in trading and clearing of derivatives amid sweeping financial regulatory reform of such markets...

Saturday, July 24, 2010

Politi: Treasury $10bn profits from bail-out

Wright: Port shipping up

Duisburg saw container volumes in the first quarter this year up 26 per cent on the same quarter of 2009. Barge operators, whose vessels account for about 30 per cent of container movements in and out of the large ports of Rotterdam and Antwerp, are benefiting from a surge of restocking by European retailers and manufacturers following the economic traumas of the past 18 months.

The waterways’ resurgence reflects a remarkable rebound in international container traffic – container imports into Europe from Asia were up more than 25 per cent this April over April 2009, when imports fell 25 per cent.

Sakoui et al: Correlation

...“In a macroeconomic crisis investors don’t lose time stock-picking. Either the whole economy is going to ground and you sell everything or the market is cheap, then you buy everything. Stock-picking comes later in the cycle,” says Stephane Mattatia, head of financial engineering and advisory at Société Générale.

“Volatile and bear periods are characterised by high correlation,” he says.

The rapid growth of exchange-traded funds may be a factor as well. As trading in ETF shares has grown in popularity, some analysts believe that it has led to increased activity in buying and selling groups of stocks and other assets.

Bullock: Credit spreads predicted to widen

Credit spreads for a broad range of companies in both the US and Europe are expected to widen over the next three months amid concern about the global economic recovery and the possibility of a sovereign default, according to a survey of credit portfolio managers at financial institutions around the world...

The IACPM, which consists of credit portfolio managers at 88 banks and other financial institutions in 14 countries, conducted the quarterly survey among its members. Sentiment turned negative in the second quarter after several quarters of improving forecasts.

Harding: Looser Fed polciy

The Fed identifies a range of options if it does need to act but all of them come with risks, opponents on the Federal Open Market Committee, and uncertainty about their effects. The two simplest measures will be to stop paying interest on bank reserves, encouraging banks to lend the money out instead, or to start reinvesting capital repayments from the Fed’s portfolio of mortgage-backed securities.

Neither is a drastic move but the Fed will expect quite a strong signalling effect from its first change towards looser policy.

Cutting interest on bank reserves has the advantage of being easy to reverse but could lead to serious distortions in the money markets.

Another possibility is a change of communication. One option that the Fed has begun to study is linking its pledge of low rates to an external condition.

At the moment, the Fed says rates are likely to stay “exceptionally low” for an “extended period”. Instead, it could say that they will stay low until a variable, such as the price level, has reached a certain target.

Academic research suggests this could be effective in preventing deflation because it commits the central bank to keeping rates at zero until the goal is reached. It would not distort markets and is more flexible than a crude promise to keep rates at zero for a fixed period.

Thursday, July 22, 2010

Duyn et al: derivatives dealers get ready for clearing shake-up

Grant: 24 hour Eures\x

Regling on European Financial Stability Facility

As chief executive of the European Financial Stability Facility, he oversees a €440bn ($554bn, £369bn) fund that can help eurozone states in difficulty, but which his political masters – the finance ministers of the European Union – hope will never be used.

Sakoui: Cash currency of risk averse investment

A survey of UK investors last month found their holding more cash in their portfolios than at any time since the aftermath of Lehman Brothers’ collapse in 2008. The Reuters poll showed that cash accounted for 8.7 per cent of their holdings.

The same poll found European investors with a 6.8 per cent cash holding. At the end of last year, those positions were about 5 per cent...

Bankers speculate that the trend is less pronounced among US investors as corporate bond issuance has been higher there and investors are less worried than those in Europe about the impact of government austerity packages

Wednesday, July 14, 2010

Spence: US growth strategy needed

Bad news summary...

To avoid an outbreak of protectionism, there has to be an alternative. President Barack Obama’s new export council, announced on Wednesday, is a step in the right direction. But a bolder move is needed: a broad public-private partnership to invest in the development of technology in parts of the tradable sector where there are opportunities to make advanced countries competitive. The goal must be to create capital-intensive jobs that have labour productivity levels consistent with advanced country incomes.

Wagsty: emerging market bonds jitters

Spreads over US Treasuries, which measure the risk premium applied to emerging market bonds, have followed a similar course. Before the global crisis, they touched a record low in 2007 of just 148 basis points. They then soared in the turmoil to as high as 865bps in late 2008, but dropped back dramatically to 231bps this April. The recent retreat to safety has seen spreads widen, to 327 bps by yesterday. But by historic standards that is still low.

Not surprisingly, emerging market borrowers have taken advantage of these low yields, raising 10 per cent more in the first half of 2010 than in the same period in 2009, which was itself a record year.

Hughes: emerging marketdebtpace

Emerging markets have been subject to inflows of hot money in the past, hitting their economies hard when the money left as quickly as it arrived. However, investors believe the financial crisis and shift in risk perceptions mean that this time it is different.

“Debt-to-GDP ratios in the developed world are about double those in emerging markets, and they’re growing,” said Sam Finkelstein, head of emerging markets debt at Goldman Sachs Asset Management.

“This makes emerging markets interesting because you’re picking up incremental spread [higher interest rates compared with developed world rates], and in return you’re actually taking less macroeconomic risk.”

Goldman’s dedicated emerging markets debt assets grew from $3.3bn in March last year to $13.2bn in March 2010.

Brown: SingaporeAsian derivatives clearing hub

...several executives said MAS had approached a number of international clearing houses, including the US-based group Intercontinental Exchange (ICE), which has Asia ambitions.

Other big international clearers such as LCH.Clearnet of the UK, the world’s largest clearer of OTC interest rate swaps, and Chicago-based CME Group may be approached as the plan progresses.

Any new clearing operation would compete with two existing exchange and clearing operations run by SGX, the Singapore exchange, and Singapore Mercantile Exchange (SMX), owned by India’s Financial Technologies group, which has been licensed and is due to launch shortly.

Tuesday, June 29, 2010

Posner: Greek debt history

The answer is probably that the market believed that either eurozone countries would discipline Greece's financial excesses or bail out Greece if they failed. If so, the irony is palpable. Greece (like most other eurozone countries) did not comply with a treaty provision requiring financial discipline but was allowed into the eurozone anyway. Investors must have reasoned that if the treaty provision governing financial discipline could be ignored, then the treaty provision banning bail-outs could be ignored as well. And they were right. But if the treaty could be ignored, then why would entering a treaty make a difference to Greece's creditworthiness in the first place? We suspect that the story is about politics, not economics. In their effort to press forward with European integration, political elites sought monetary union in the hope that it would forge bonds between still mutually suspicious nationalities. But monetary (and political) union cannot succeed when vast disparities of wealth exist across regions.

Political elites squared this circle by (we suspect) encouraging national banks to buy up Greek debt despite reservations about its quality - so that transfers would take place but disguised as credit made cheap by implicit government guarantees.

Authors: Deflation/inflation debate

Timpel: derivatives clearing

The G20 has agreed that OTC derivatives contracts should, if sufficiently standardised, be moved to CCPs and be reported to trade repositories. The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) are currently providing guidance on how OTC derivatives' CCPs and trade repositories may increase their resilience. The European Commission will propose European Market Infrastructure Legislation that will establish EU legislative frameworks for CCPs and trade repositories.

Briathwaite, Guerrera; Fed review bank pay models

Barber on EU problems/solutions

Friday, June 18, 2010

Blitz: UN global crime sector an economic power

In one of the most comprehensive analyses undertaken of transnational criminal activity, the UN Office on Drugs and Crime has calculated that the illicit trade in a range of commodities – including drugs, people, arms, fake goods and stolen natural resources – has an annual value of roughly $130bn.

The report shows how transnational crime continues to be dominated by the trade in cocaine and heroin, a business whose product is worth about $105bn a year.

But it suggests that other criminal activities – including the trafficking of natural resources, product counterfeiting and maritime piracy – are becoming of increasing concern to the international community.


“Transnational crime has become a threat to peace and development, even to the sovereignty of nations,” says Antonio Maria Costa, the UNODC’s executive director. “Today, the criminal market spans the planet: illicit goods are sourced from one continent, trafficked across another, and marketed in a third.”

Mr Costa says trans­national crime has become so intense that it risks undermining a number of states, most notably in Africa. The world’s big powers are showing “benign neglect” towards a problem that is hurting everyone, “especially poor countries that are not able to defend themselves”.

Mackenzie: US Treasuries disbelief in US growth

But the real gains have come from owning longer-dated Treasury paper, as an index of bonds beyond 20 years in maturity is up 9 per cent so far in 2010, after a slide of 21.4 per cent.

The value of long-term bonds is primarily determined by expectations of inflation, which has seen the core consumer price index hit a 44-year low.

A weaker economy in the second half of this year, accompanied by further downward pressure on prices, would be a plus for bonds.

Lombard Street Research notes that broad money in the US has contracted for the past six months – and for 15 months of the past 18 – at a time when the Fed has maintained easy monetary policy. “The message from the US broad money and credit trends over the past two years is clear; there is little likelihood of a return to sustained trend rate, let alone above-trend, growth in the near future,” says Gabriel Stein, director at Lombard.

Against that backdrop, the debate now turns on whether bond yields will break the lower band of their range, accompanied by stocks hitting fresh lows in the coming months.

Oakley: Interbank rates reflect Europe bank strss

European interbank lending rates have diverged to their widest levels since they were launched in December 1998 because of stresses in the eurozone banking system.

Euribor money market rates, which are set by 42 banks in Europe, have risen above euro Libor rates, which are set by 16 banks in London, due to greater tensions in the eurozone.

Thursday, May 20, 2010

Luce: Financial reform bill passes

Politi on Fed mortgage asset sales

The Federal Reserve is leaning towards a plan to sell more than $1,000bn worth of mortgage assets gradually over five years, according to minutes from last month’s meeting of US monetary policymakers.

Although no final decision has been made, notes from the April 27-28 meeting revealed that most of the Federal Open Market Committee has concluded that mortgage asset sales should be a part of the US central bank’s efforts to tighten monetary policy.

But a majority of FOMC members also indicated that asset sales should be “deferred for some time” while the economy gathers strength and should not precede a rise in interest rates.

Guha: A NYbor?

A push is under way in New York to create a new benchmark for dollar-denominated loans to rival the London interbank offered rate, better known as Libor.

The New York benchmark - dubbed "NYbor" - would put more weight on borrowing costs for US banks and less weight on borrowing costs for European banks.

This follows mounting criticism of Libor in the US. The British Bankers' Association, which compiles the benchmark rate, is reviewing claims that some banks might have misreported their borrowing costs, thus distorting Libor...

The Fed is unhappy about the fact that elevated Libor rates result in high rates for US loans benchmarked against dollar Libor, regardless of the source of the strain on Libor. It thinks the people behind the "NYbor" concept are doing valuable work exploring alternative ways to construct a borrowing benchmark.

But the US central bank leans towards reforming the way Libor is constructed rather than abandoning it in favour of a New York-based measure dominated by the borrowing rates paid by US banks.

Wednesday, May 19, 2010

Blas, Meyer. Cargill finds demand for processed food in emeerging markets stable

The appetite of emerging markets for processed food, meat and dairy products had confounded fears of a big drop in demand in the wake of the financial crisis, said Cargill, the big US agribusiness...

In previous episodes of economic turmoil, people in emerging markets had returned to traditional staple grains.

Cargill is at the centre of global agricultural flows and its business relationships with leading food companies, ranging from Nestlé to Kraft, allow it to anticipate changes in consumption.

"If you just looked across the shopping basket in those countries where their gross domestic product is $3,000 to $10,000 a year . . . the diet was remarkably resilient this time, so we start from a better base than we did before," he said.

Blas, Meyer

Cargill is one of the hidden companies of the global economy. As the world’s agribusiness leader, it sits at the nexus of one of the world’s biggest and most critical industries – a force of great importance to millions of farmers as well as to large food multinationals from Nestlé to Coca-Cola and Kraft, though it is much less well-known as a name. Its significance – as the equivalent of ExxonMobil for the agriculture markets – is set to increase further as food demand rises in China, India and in parts of the developing world, and the use of biofuels grows in the west...

...the past three years are shaping up to be the best in Cargill’s 145-year history. Helped by the new “farm to fork” approach, the group is set to earn almost $10bn in the 2008-10 period, up from $1.5bn in 1998-2000 when the shake-up, called “strategic intent 2010”, was launched.

With nearly $117bn in revenues last year and 138,000 employees based in 67 countries, Cargill also ranks as America’s biggest privately owned company...

Tett: Ero banks' dollar funding gap and Libor

Last week, European leaders unveiled a €750bn (£642bn, $927bn) aid package designed to remove market fears about weak eurozone countries such as Greece, Portugal and Spain, and by extension calm any funding pressures for eurozone banks.

But something curious has been under way in the dollar funding markets. This week, the average cost banks in Europe need to pay to borrow dollars for three months has gone on rising: it was running at 46 basis points yesterday, up from 30bp earlier this month.

Meanwhile, the closely watched spread between the three-month dollar Libor and the "risk-free" Overnight Indexed Swap rate has risen to about 24bp. That does not signal as much stress as during the Lehman Brothers panic.

However, it is worse than anything seen for almost a year, and that is worrying central bankers.

The issue appears to relate to an estimated $500bn-odd funding gap haunting European banks...

Friday, May 14, 2010

Webber: Argentina's debt swap

The first phase of Argentina’s debt swap, designed to close the chapter on its catastrophic 2001 default, closes today but Italian creditors owed more than a quarter of the unpaid debt may yet prove hard to sway.

The swap closes on June 7 but institutional investors have until today – a deadline which Argentina extended by two days this week – to sign up early without incurring penalties. The results of this first tranche will be announced in a week

reference: Argentina announces terms of new debt swap April 16

Oakley: Libor rise

The most important indicator in the markets, the spread between three-month dollar Libor and so-called "risk-free" overnight rates - deemed a pure measure of risk - rose to its highest level since August. This spread rose to 0.215 per cent yesterday, having been below 0.10 per cent before the most recent funding jitters emerged.

Three-month dollar Libor edged higher to 0.434 per cent - also a nine-month high. This daily setting has steadily risen from below 0.30 per cent just more than a month ago.

Kirchgaessner: GS shores up ShoreBank

Budden: Euro breaks last week’s 14-month lows of $1.2510

Wednesday, May 12, 2010

Politi on Fed's test of "term deposit facility"

Once the tool is ramped up to a larger scale, its purpose is to provide an incentive for banks to hold money at the central bank instead of lending it. That would help shrink the Fed's balance sheet from its current size above $2,300bn to below $1,000bn, or close to its pre-financial crisis level. The Fed has already tested so-called "reverse repurchase agreements" as another tool it intends to use to drain liquidity from the financial system - most probably shortly before it raises interest rates.

Saturday, May 8, 2010

Unter-Tilney: The pirate sector

Lighter, in some sense, and appealing all the same, piracy and Chicago economics:

'...On-board democracy was not some 'quasi-socialist pirate ideology', but instead was designed to foster a feeling of solidarity, which enhanced each pirate's self interest in getting as much loot as possible...'

Thursday, May 6, 2010

Rogoff reiterates sovereign debt crises follow financial crises

The cruel irony of the euro area’s predicament is that, in many ways, the whole exercise was designed to produce the very credit explosion that bedevils it today. After all, one of the driving motivations of the euro was to enable member states to compete with the US for a share of the global reserve currency business. Reserve currency status, in turn, is the essence of America’s “exorbitant privilege” (a term coined by Valéry Giscard d’Estaing, the former French president). The most important perk the US gets is the ability to issue debt at a lower interest rate than would otherwise be the case. Indeed, recent research suggests that simply by enhancing the size and liquidity of financial markets, the euro may have helped to lower real interest rates across Europe, and not just for government borrowers...

Oakley on tight credit, counterparty risk around Europe's sovereign crises

...Banks are now more reluctant to lend to each other than at any point since the problems of Greece first blew up last October, according to analysts at Tullett Prebon and Icap, the interdealer brokers.

Deteriorating conditions in interbank money markets are leading some analysts to predict the next crisis will be among the banks. Even Europe's biggest banks, such as Deutsche Bank, Barclays, BNP Paribas and Société Générale, are suffering as the cost of insuring these banks against default rises.

A key measure of bank risk, the overnight index swap (OIS) spread on futures contracts in the eurozone, rose to an all-time high this week. This measures the premium over "risk-free" overnight rates of three-month rates, which carry greater credit risk.

Another warning sign is a significant shift to overnight lending by banks, particularly within troubled areas of the eurozone. Of the €450bn ($589bn) in daily turnover in the European money markets, 90 per cent is now in overnight lending, according to interdealer brokers...

Tett: Bear Sterns in Greece

Plender on US UK public liabilities

As Pogoff says, sovereign crises wash up a lot of implicit obligations...

Good run through of how higher discount rates lower future liabilities, and the reverse for the California's three biggest public pension funds, Calpers, Calstrs and the University of California Retirement System...

"On this basis, the funding shortfall of the three funds at July 2008 would be $450bn rather than the disclosed figure of $55bn.

The Stanford academics estimate the current deficit at more than $500bn, which, on my calculation, amounts to five times the total tax revenues of the state of California..."

Tuesday, May 4, 2010

Donhue on OTC ground rules

This article by the chairman of the Deposittory Trust & Clearing Corp. summarizes comments made by CME and ISDA representatives at the breakout panel discussion on derivatives at 2010 Booth Management conference: that regulated clearing must work through pricing and margining nuts and bolts faced by clearing houses:

:The necessary components of the solution are clear in proposals on both sides of the Atlantic. Standardise OTC derivatives, where possible. Where there is sufficient standardisation and liquidity, require the use of central counterparties to collect margin and guarantee trades. Ensurethat all OTC derivative trades are centrally reported to provide appropriate transparency to supervisors and to markets generally...

The value of a trade repository is that it has all the relevant trading data, including more detailed information that supports a thorough understanding of the net open interest relating to reference entities. It does this on a market-wide basis that allows it to provide the markets and regulators with a single view of risk from a central vantage point. Fulfilling these different perspectives in a global market is only achievable with a global source, regardless of the asset class involved.

Recognition of the importance of a single trade repository for each asset class has grown in Europe and the US. But some legislative proposals still stop short of recognising the full value of such repositories because these proposals only require a subset of data to be reported to them, in contrast to current market practice of reporting both cleared and uncleared trades to a repository.

If these proposals go ahead, they will fragment reporting and have the unintended consequence of preventing a comprehensive view of risk for regulators.

Global policymakers must be assured that the markets have access to a solution that addresses systemic risk concerns..."

Masters: Basel chief says bank tax premature

Summary of reforms

The Basel committee has proposed global reforms it expects to refine in July and adopt formally by the end of this year. The proposals include:

● Tighter rules for core tier-one capital, the building block of a bank’s reserves
● Raising the minimum ratio of tier-one capital to risk-weighted assets to a determined level. This is the main measure of bank safety
● Increasing capital requirements for trading books. This will make trading with the bank’s own money more expensive
● A new leverage ratio that would cap the size of a bank’s overall assets relative to its tier-one capital
● Two more liquidity rules. One would require banks to have enough easy-to-sell assets to survive 30 days of market chaos. The second, a “net stable funding ratio”, would require each bank to keep a minimum level of long-term funding relative to its assets
● Countercyclical capital buffers that would increase capital requirements at the height of a boom and limit a bank’s abilities to pay dividends and bonuses if its capital ratios became too low

Friday, April 30, 2010

Cochrane, Booth School: Too big to fail is the key to 'crisis'

We are left with only one plausible explanation for why
Lehman’s failure could have had such wide-ranging effect:
After the Bear Stearns bailout earlier in the year, markets
came to the conclusion that investment banks and bank
holding companies were “too big to fail” and would be bailed
out. But when the government did not bail out Lehman, and
in fact said it lacked the legal authority to do so, everyone
reassessed that expectation. “Maybe the government will not,
or cannot, bail out Citigroup?” Suddenly, it made perfect
sense to run like mad...

Once everyone expects a bailout, government has to provide
it or else chaos will result.Obviously, in this view there is nothing
inherently “systemic” about the behavior of Lehman
Brothers or other large banks.What is systemic is the expectation
of a bailout. The policy question is simply how to
escape this horrible moral-hazard trap.

The tarp mess did not help. Federal Reserve Chairman
Ben Bernanke, Treasury Secretary Henry Paulson, and
President Bush got on television and said, basically, “The
financial system is about to collapse. We are in danger of an
economic calamity worse than the Great Depression. We
need $700 billion, and we won’t tell you what we’re going to
do with it. If you need a hint, we justmade it illegal to shortsell
bank stocks.”

These speeches should be remembered as a case study in
how to start a financial crisis, not how to relieve one....

Tett, Garnham: the carry trade

The carry trade has been “one of the principal methods in which debtor nations have been able to recycle their deficits over the past 40 years”, says Neil Record of Record Currency Management, a specialist adviser. “Surplus countries have historically offered their citizens lower short-term interest rates than deficit countries, and this has encouraged these citizens to seek higher returns – and therefore investment risk – elsewhere.”

... central banks loosened monetary policy to tackle the global financial crisis, some investors have used this cheap, short-term funding to make big bets on higher-yielding assets, ranging from Brazilian shares to American mortgage bonds...

Mr Lee thinks many of the investors he tracks have switched out of yen carry trades into the dollar in the past couple of years. He calculates that there are some $500bn-$750bn of dollar-based carry trades in the global financial system, plus $250bn-odd funded in other currencies.

Others have even bigger estimates. “To me the big risk this year is the dollar carry trade,” Zhu Min, deputy governor of the People’s Bank of China, said recently, adding that there was now a real risk of a violent unwinding. “It is a massive issue. Estimates are that the dollar carry trade is $1,500bn – which is much bigger than Japan’s carry trade was.”

Jackson on governance

Still, let us pursue the argument. It seems clear that the gap – the so-called agency problem – has indeed been widening in the developed world in recent years.

One main reason for that has been the extreme dispersion of the shareholder base. That in turn has various causes, ranging from the reduced involvement of domestic life and pension funds to the advent of high-frequency trading.

But, taken with the globalisation of big companies’ shareholder registers, this can make boards unclear on what the owners want, or indeed who they are. And that can create uncertainty and short-termism in strategy.

Added to that, the big institutions have farmed out their investing to fund managers, thus further attenuating the link between board and owners. And market regulation has, with the best intentions, in effect stifled communication. Boards can only talk to the owners once a quarter, through official announcements. Anything they say in between can only be repetition.

Compare the eastern model, where companies are largely owned and controlled by governments or their sovereign wealth funds. The resulting conduct of boards, according to one veteran UK banker with experience in Singapore, can be “chillingly effective”.

Friday, April 23, 2010

Politi: Fed adds $47.4bn to Treasury coffers

The Federal Reserve sent $47.4bn of its 2009 profits to the US Treasury, a record payment that highlights how the US central bank was able to turn its huge intervention to rescue the financial system into a successful investment.

In annual results released yesterday, the Fed said earnings rose 50 per cent last year to $53.4bn (€40bn, £34.7bn), driven mainly by profits incurred from interest revenues on the extensive portfolio of mortgage-backed securities (MBS) it bought to prop up the stricken housing market...Over the past decade or so, Fed repayments to the Treasury have averaged about $25bn per year, US central bank officials said.

Beattie: Trade recovery fragile..

The (ICC) report focused on trade finance - the form of credit which, in effect, insures against the importer crashing while goods are in transit - whose price rose sharply in 2008 as the global financial crisis took hold.

Amid fears that the machinery of world trade would seize up, multilateral development banks, including the World Bank, launched lending programmes to try to catalyse a revival in trade credit.

"The costs of trade finance remain substantially higher than they were pre-crisis, raising the problem of affordability for exporters," the chamber said. Some 30 per cent of respondents indicated an increase in fees for commercial letters of credit and other instruments.

Banks said customers were requiring higher levels of insurance when dealing with their trading partners - demanding confirmed letters of credit rather than taking payments more on trust...

Wednesday, April 21, 2010

China is the key to unwinding new global imbalances

...But emerging economies will want to moderate inflows of capital both for macroprudential reasons and to avoid becoming uncompetitive due to rising currency values. What should they do? The only two real options are capital controls and currency appreciation. But what is becoming clear is that the landscape is rife with beggar-thy-neighbour possibilities. For example, if some countries restrict capital, there is the risk that capital gets diverted to others, increasing pressure on them. And competitive non-appreciation - the revealed preference of many emerging economies given that their main trade competitor, China, has a fixed exchange rate - imposes large systemic costs, of global overheating and excess liquidity creation, as reserves pile up around the world...

van Duyn: consumer securitization revival

Even after the Fed's programme - the Talf - ended in March, several new securities backed by auto loans and other types of receivables have been sold to investors. Yet asset-backed securities (ABS) markets remain a fraction of their former selves - limiting the availability of credit.

Global ABS volumes, which excludes mortgage-backed securities, year-to-date are at their lowest since 1995, according to Dealogic. This is down even from 2009 - when many capital markets were still in crisis - and is 90 per cent lower than the $349bn raised in 2007. Uncertainty about future regulations and the lack of investor confidence in these types of securities continues...

Tuesday, April 20, 2010

Mansoor Mohi-uddin: Beware the consequences of a resurgent greenback

Thorough article on currency regime shift: the change of the dollar from a safe haven to a growth currency

"This year the currency markets have been torn between fears over budget deficits in the eurozone and hopes that the global economic recovery is gathering pace. Amid all the noise and angst, however, a more profound change seems to be taking place, with the dollar starting to behave as a growth currency, appreciating at the same time as investors seek more risk in equities, commodities and emerging markets. In short, the exchange rate markets seem to be undergoing one of their periodic "regime shifts"..."