Cry Havoc! US M2 Velocity Sinks To Lowest Level In History As Of Q1 (Whither Q2?)

“Cry ‘Havoc!,’ and let slip the dogs of war low M2 velocity.”

In Q1, US M2 Money Velocity hit an all-time low as M2 Money Supply surged. That is, the ratio of GDP to Money Supply is indicating a stall.

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Of course, US 2Q GDP is expected to crash with the shutdown.


And the equity markets plunged 2% when the actual “Dog of War” Fauci cast negativism on reopening the economy.


The dogs of low money velocity are upon us!


The “Unintended” Consequences of Fed’s Swap Lines (Made It A Little TOO Attractive)

How about them interbank rates? The Fed is dancing with joy!!


(Bloomberg) — The Federal Reserve’s efforts to beef up its swap program may have made it a little too attractive.

While the U.S. benchmark rate at which banks borrow from one another is coming down, its European equivalent — known as Euribor — jumped 2.9 basis points to a fresh four-year high on Thursday. That’s even after the European Central Bank moved to ease funding pressures by moderating collateral restrictions for financial institutions seeking to borrow from the central bank.


It’s a disconnect that’s sprung up in part because the Fed has helped bring down the cost of dollars to such an extent that they’re cheaper to borrow in cross-currency markets than any major currency. Opportunistic players are tapping local markets in Europe to swap into dollars, elevating domestic borrowing costs.

“This is a tightening of financial conditions at a time central banks are trying to keep rates low and credit flowing,” said Antoine Bouvet, head of rates strategy at ING Bank NV. Financial fragmentation across European markets — as shown by the stretched spread between benchmark Italian and German yields — is further complicating the ECB’s efforts, he said.

That dislocation showed signs of easing Thursday on reports that German Chancellor Angela Merkel supports a huge stimulus package for the bloc. Meanwhile, the ECB keeps rolling out new measures, having already pledged to buy more than 1 trillion euros of debt over the rest of this year, scrapped most of its limits on which markets it can target, and decided to accept junk-rated debt as collateral for its lending program to help businesses.

Analysts see its latest steps to ease funding pressures ultimately helping. “It provides a backstop for the market not to be concerned about bank funding issues related to a shrinking collateral pool in case of rating downgrades,” Frederik Ducrozet, strategist at Banque Pictet & Cie in Geneva, wrote in a note.

Early signs in the futures market suggest Euribor will get a reprieve within the next couple of months.

And as dollar Libor’s spread over swaps tightens — as indicated by futures markets — three-month cross-currency basis should drift lower to erode the funding advantage for local currencies, and reduce the incentive for opportunists to bid up the cost of funds in domestic markets.

Three-month dollar Libor fell 2.9 basis points on Thursday to below 1% for the first time in more than a month, driving its premium above overnight index swaps — a proxy for the risk-free rate — lower by a similar amount.

Some traders have even begun to hedge against negative Libor rates, using the Eurodollar options market.


Sub-zero rates are already a reality in Japan, where the three-month euro-yen Tibor fixing dropped 6.6 basis points to -0.048%, posting a negative fix for the first time ever. Euroyen futures popped higher in response.

With yen-OIS rates steady, the move seemed unrelated to policy expectations. Instead, overseas banks could be in the driving seat; the domestically-focused Tibor fixing was unchanged on the day.


US Core “Inflation” Falls To 2.1% From 2.4% Despite Massive Fed Intervention

The G-7 Central Banks have gone wild lowering their target rates and increasing balance sheet purchases.

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The US “inflation” numbers for March


Despite fears of runaway, Jimmy Carter-style inflation, core inflation actually fell to 2.1% YoY.


One of the culprits? Declining airline fares and lodging away from home (courtesy of MacroMarkets). This is similar to the post 9-11 recession issues.


The US Inflation Swap Forward 5Y5Y is only 1.9160%.


And Treasury Inflation Protection Securities (TIPS) continue to have negative yields.


Of course, no country does inflation like Venezuela and Argentina!


Is The Fed turning liquidity into cottage cheese?

The Fed’s Bigger Boat! Is The Fed’s Cure Worse Than the Covid-19 Virus?

Apparently, The Federal Reserve and US Treasury think they need a bigger boat!

(Bloomberg) — The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus.  Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. 

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.

PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.

TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.

SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.

MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position.

What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

Here is part of the mayhem The Fed/Treasury are trying to mitigate. The CitiMortgage Alternative Loan Trust 2007-A4 asset-backed security.


Yes, the US Treasury curve is now below 0.75% from 10 years in, including negative yields on most Treasury bills.


The US Treasury actives curve and On/off the run curves are under 1% at 15 years and in.


Welcome to Amity Island, in a shutdown over the Corona-19 virus.


$423 Billion Distressed-Debt Deluge in March Doubles Lehman Wave (Hair Of The Dog!)

We are back to the collapse of Lehman Brothers, but this time the virus is not due to the banking system.

(Bloomberg) — Distressed debt supply has surged $234 billion to $559 billion in just the past week, escalating this month’s jump to $423 billion and setting a pace that would nearly double the $215 billion record for a single month set in October 2008. If the total ends the month at these levels, it would be the biggest-ever increase in the par amount of debt in the ICE BofAML US Distressed Index.


Energy isn’t solely driving the distressed ratio (44.5%) higher anymore as all sectors now have double-digit distressed ratios.

Commercial and industrial (C&I) lending is approaching zero growth as of February.

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Fortunately for America, The Federal Reserve is on call!


Thanks to Jesse at Jesse’s Cafe Americain!

Dow Finishes Worst Week Since 2008 (Dow Down 913 On Friday) As LOIS Spread Erupts [What Can The Fed Do?]

How far will Central Banks go to save the economy (or banks)? The Fed Funds target rate is back to Bernanke (BtoB?) in late 2008.  And The Fed’s balance sheet keeps rising (after a momentary respite).


But it seems that all the stimulus (Federal government and Federal Reserve) is having trouble saving the market.


The S&P 500 hasn’t done so well either with today’s drop falling below the lowest P/E band.


US Treasuries rose again today and 10-year Treasury yields dropped almost 30 basis points.


And the spread between the 3 month Libor rate and the NY Fed’s Secured Overnight Finance rate is going up … and up.


Treasury Repo collateral … again?


They will do it on Fed Time!

Liquidity Trap! 3M Treasury Yield At -0.025%

A liquidity trap is a situation in which, “after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rather than holding a debt which yields so low a rate of interest.”

Well, Buckaroos, we are in a liquidity trap with the 3 month Treasury yield at -0.025%.


A closer look at the T-bill market today.


So here we sit in a classic liquidity trap!


Fed Chair Jerome Powell in a liquidity trap!


Mega thanks to Jesse at Jesse’s Cafe Americain for the jail jpg.

Frankly, I like The Byrds version of Buckaroobetter with the great Clarence White on the Fender Telecaster B-Bender guitar.

10Y T-Notes Bid-Ask Spreads Widen To Financial Crisis Levels

The markets are over, under, sideways, down.

Bid-ask spreads on the 10-year Treasury Notes have exploded and is back to financial crisis levels.

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A steepening Treasury yield curve bodes ill for stocks … and volatility.


Hedge, hedge, hedge!

Fed Restarting Commercial Paper Funding Facility (Everybody Panic!)

As Jackie Moon screamed in the movie Semi-Pro, “Everybody Panic!”

(Bloomberg) – By Christopher Condon – The Federal Reserve will restart a financial crisis-era program to help U.S. companies borrow through the commercial paper market after it came under “considerable strain” due to the coronavirus pandemic.

The central bank is using emergency authorities to establish the Commercial Paper Funding Facility with the approval of the Treasury secretary, according to a Fed statement on Tuesday. The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund.

The Fed said it will provide financing to a special-purpose vehicle that will purchase A1/P1 rated commercial paper from eligible companies, and purchases will last for one year unless the Fed extends the program.

Pricing will be based on the then-current 3-month overnight index swap rate plus 200 basis points, and each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.


Everybody panic!


*Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days.

LOIS (LIBOR-Overnight Indexed Swap) Spread Spikes As Fed Adds $4.5 Trillion To Its Balance Sheet

Historically, when the spread between LIBOR and the safer OIS (overnight indexed swap)  widened, it meant that banks were having trouble borrowing and was a warning of danger for the economy. And the LOIS spread is widening!


The Federal Reserve has reversed course on its balance sheet unwind, but the reversal  started in September of 2019, well ahead of the known corona-virus outbreak in Wuhan China. In fact, The Fed has added $4.5 trillion in recent weeks.


Apparently at the December 11, 2019, the Fed’s Open Market Committee (FOMC) only saw Fed Funds target rate increases coming.


Treasury Repo collateral has spiked recently.


And we are seeing both short and long rates crashing (but the short rates are crashing faster than long rates,


leading to a steepening of the Treasury yield curve.


Treasury volatility is on the rise again.


The coronavirus is NOT a good thing.

Yes, coronavirus fears are sweeping the globe.

But The Fed drives me crazy!