Abstract:
This paper examines the impact of the financial crisis of 2008, specifically the bankruptcy of Lehman Brothers, on the federal funds market. Rather than a complete collapse of lending in the presence of a market-wide shock, we see that banks became more restrictive in their choice of counterparties. Following the Lehman bankruptcy, we find that amounts and spreads became more sensitive to a borrowing bank’s characteristics. While the market did not contract dramatically, lending rates increased. Further, the market did not seem to expand to meet the increased demand predicted by the drop in other bank funding markets. We examine discount window borrowing as a proxy for unmet fed funds demand and find that the fed funds market is not indiscriminate. As expected, borrowers who access the discount window have a lower return on assets. On the lender side, we do not find that the characteristics of the lending bank significantly affect the amount of interbank loans it makes. In particular, we do not find that worse performing banks began hoarding liquidity and indiscriminately reducing their lending.
Monday, March 8, 2010
Baribeau: Fed expands reverse repos counterparties
Fed statement:
The initial efforts of the New York Fed will be aimed at firms that typically provide large amounts of short-term funding to the financial markets. This approach will ensure that the Federal Reserve quickly achieves significant capacity for conducting reverse repo operations while allowing the Trading Desk at the New York Fed to utilize its current infrastructure for conducting and settling such operations. Over time, the New York Fed expects it will modify the counterparty criteria to include a broader set of counterparties.
The initial efforts of the New York Fed will be aimed at firms that typically provide large amounts of short-term funding to the financial markets. This approach will ensure that the Federal Reserve quickly achieves significant capacity for conducting reverse repo operations while allowing the Trading Desk at the New York Fed to utilize its current infrastructure for conducting and settling such operations. Over time, the New York Fed expects it will modify the counterparty criteria to include a broader set of counterparties.
Mackenzie: Chinese reserves rebalancing
"...In terms of China's portfolio of Treasuries in the Tic report, the December data show a further big reduction in holdings of short-dated bills and buying of longer-dated coupon debt. China's T-bill holdings dropped by $38.8bn in December while its holdings of notes rose by $4.6bn.
Rather than selling any of its holdings, China appears to have let the bills mature and then used some of the proceeds to buy longer-dated coupons, analysts say. Extending its purchases along the yield curve is, partly, a sign of China's confidence in the US government's ability to service its debt. The Tic data show that China has not diversified into US equities or corporate bonds.
During the financial crisis, China built up holdings of short-dated T-bills from $14bn in mid-2008 to $210bn by May 2009 and they are now back around $70bn.
"The latest data is consistent with them shrinking the T-bill mountain rapidly, although there is more to come, as the likely underlying desirable holdings of T-bills is probably nearer $20bn," says Alan Ruskin, strategist at RBS Securities.
"China is simply fine tuning its portfolio and as US banks and consumers continue deleveraging, there will be enough domestic demand to buy Treasuries," says John Brady, senior vice-president of global interest rates at MF Global..."
Rather than selling any of its holdings, China appears to have let the bills mature and then used some of the proceeds to buy longer-dated coupons, analysts say. Extending its purchases along the yield curve is, partly, a sign of China's confidence in the US government's ability to service its debt. The Tic data show that China has not diversified into US equities or corporate bonds.
During the financial crisis, China built up holdings of short-dated T-bills from $14bn in mid-2008 to $210bn by May 2009 and they are now back around $70bn.
"The latest data is consistent with them shrinking the T-bill mountain rapidly, although there is more to come, as the likely underlying desirable holdings of T-bills is probably nearer $20bn," says Alan Ruskin, strategist at RBS Securities.
"China is simply fine tuning its portfolio and as US banks and consumers continue deleveraging, there will be enough domestic demand to buy Treasuries," says John Brady, senior vice-president of global interest rates at MF Global..."
Mackenzie on the primary dealing system
"The primary dealer system acts as the underwriter of the Treasury sales which are sold in a Dutch-style auction, writes Michael Mackenzie in New York .
Under this approach, primary dealers and other investors make bids at set dollar amounts and enter them into a computer system, hot-wired to the Federal Reserve Bank of New York. From there the US Treasury collates all the bids and determines the rate at which it can sell the debt. Ahead of the 1pm auction deadline, dealers and investors try to ascertain what yield will be awarded for the sale. A guide is the grey market, which indicates where the pending security will trade.
If investors need to own the issue, they will place bids below the grey market yield, while others, banking on weak demand, may choose to place bids at higher yields.
Gauging the demand from investors who buy through the dealers, known as the "indirect bid" or other financial institutions who buy directly from the Treasury is the crucial element.
The indirect bids handled by primary dealers are split into two types of orders: those from customers such as hedge funds and money managers and the "house" bid from the banks' bond desks."
Under this approach, primary dealers and other investors make bids at set dollar amounts and enter them into a computer system, hot-wired to the Federal Reserve Bank of New York. From there the US Treasury collates all the bids and determines the rate at which it can sell the debt. Ahead of the 1pm auction deadline, dealers and investors try to ascertain what yield will be awarded for the sale. A guide is the grey market, which indicates where the pending security will trade.
If investors need to own the issue, they will place bids below the grey market yield, while others, banking on weak demand, may choose to place bids at higher yields.
Gauging the demand from investors who buy through the dealers, known as the "indirect bid" or other financial institutions who buy directly from the Treasury is the crucial element.
The indirect bids handled by primary dealers are split into two types of orders: those from customers such as hedge funds and money managers and the "house" bid from the banks' bond desks."
MacKenzie: Treasury buyers buying direct
"...That could make bond sales more volatile and potentially more expensive for the US Treasury as the debt is issued at higher yields. "The high direct bid is creating uncertainty on the part of dealers and that could lead to more volatile auctions and trading as dealers become more cautious about providing aggressive prices," says Mike Pond, Treasury strategist at Barclays Capital..."
"...The growing size and number of auctions in the past year has encouraged more investors to wait for debt sales, rather than accumulate Treasury holdings over time.
For some time, liquidity has been better around auctions, than the secondary market, say investors and dealers.
"Auctions can be viewed as liquidity events," says Tony Crescenzi, portfolio manager at Pimco. "They are a time when investors can buy a large amount of Treasuries without causing a big change in prices."
If this manifests itself as a growing direct bid, it could mean a less efficient bond market for investors and ultimately the taxpayer as dealers adjust to a new auction dynamic.
"To the extent that the US Treasury likes a stable government bond market, this could mitigate that objective and over time become more costly for taxpayers," says Mr Pond..."
"...The growing size and number of auctions in the past year has encouraged more investors to wait for debt sales, rather than accumulate Treasury holdings over time.
For some time, liquidity has been better around auctions, than the secondary market, say investors and dealers.
"Auctions can be viewed as liquidity events," says Tony Crescenzi, portfolio manager at Pimco. "They are a time when investors can buy a large amount of Treasuries without causing a big change in prices."
If this manifests itself as a growing direct bid, it could mean a less efficient bond market for investors and ultimately the taxpayer as dealers adjust to a new auction dynamic.
"To the extent that the US Treasury likes a stable government bond market, this could mitigate that objective and over time become more costly for taxpayers," says Mr Pond..."
Tuesday, March 2, 2010
Mackenzie: Bunds and Treasuries
"...traders are focusing on something else, namely the long-term interest rate differentials between the US and Europe as an indicator of where the currencies should be trading against each other.
The relationship between 10-year German Bund yields and US Treasuries grabs the attention of the currency market from time to time. The reason this is happening now is because of the divergence that is emerging between the monetary policy of the US Federal Reserve and that of the European Central Bank.
"The currency market starts paying attention to this yield relationship whenever there are contrasts in central bank expectations," says Ashraf Laidi, chief market strategist at CMC Markets.
He says this is the currency market's "money play": the ECB needs to keep supplying liquidity as worries about fiscally weak countries on the eurozone periphery weigh on market sentiment, while the Fed has started talking about its exit strategy from easy monetary policy..."
Subscribe to:
Comments (Atom)
