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