Fear! Interest Rate Derivatives Trading Explodes to $6.5 Trillion Per Day

Brexit, slowing global growth, Central Bank monetary follicies (negative rates). Lots of economic uncertainty and a growing demand to hedge interest rates. In other words, lots of fear.

According to the BIS, daily turnover of OTC interest rate derivatives averaged $6.5 trillion in April 2019, up markedly from the April 2016 survey when it averaged $2.7 trillion per day. This rise appears to have been driven mainly by increased hedging and positioning amid shifting prospects for growth and monetary policy.

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However, other factors also played a role. Much of the turnover in April 2019 was in shorter-term contracts, which are rolled over more often. In addition, the 2019 survey saw more comprehensive reporting of related party trades than in previous surveys. Average daily turnover in April 2019, after adjusting for these trades, is estimated to have been closer to $5.8 trillion in April 2019, up around 120% since the 2016 survey.

The majority of turnover of OTC interest rate derivatives is in swaps and denominated in the mighty US dollar.

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The home of the largest turnover (aka, trading) is in the UK, followed by Hong Kong and then the USA.

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Yes, lots of fear regarding interest rates.

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Perry Omo? Fed Will Likely Restart QE In November (SOFR, Repo Rates Stabilize To Near Normal)

Is Fed Chair Jerome Powell really Perry Como? Or Perry OMO?

To the disappointment of many, Powell did not lower the target rate by 50 points and did not announce a resumption of QE.  Instead, the FOMC realigned both interest on excess reserves (IOER) and the reverse repo (RRP) rate lower by 5bp. Powell noted during his press conference that the Fed would use temporary open market operations (OMOs) “for the foreseeable future” to address pressures in funding markets.

However, and the reason why stocks shot up just before 3pm ET, is that that’s when Powell added that “it’s possible that we’ll need to resume the organic growth of the balance sheet, earlier than we thought. … We’ll be looking at this carefully in coming days and taking it up at the next meeting” in late October. Said otherwise, the Fed may not have announcer QE4 yesterday, but it will likely announce it in the very near future.

Sure enough, as Goldman wrote in its FOMC post-mortem, “we took this as a fairly strong hint and now expect the Fed to resume trend growth of its balance sheet in November with permanent OMOs. It is possible that the FOMC will take that opportunity to also reach a final decision on possibly shortening the maturity composition of its purchases, which it discussed at its May meeting.”

With all the OMO (or Perrys), the Fed’s Secured Overnight Finance Rate (SOFR) stabilized to normal levels.

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And the repo rate returned to near normal with the massive intervention with OMO.

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Fed Chair Jerome Powell (aka, Perry Omo).  Hot diggity dog. …

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On a side note, I tripped on a weight at the gym and fell against a weight machine. Fractured rib, badly swollen knee and dislocated perhaps broken finger(s). I call for a ban on power lifters dropping their weights and having them bounce in front of me!

The Crazy World Of Jerome Powell: Fed’s FOMC Lowers Target Rate By 25 BPS As Repo, SOFR Rates Balloon, Dow Drops Over 150 Pts

The Fed is the God of Hellfire!

The FOMC lower the Fed’s target rate by 25 basis points to 2.00%.

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The NY Fed’s SOFR rate ballooned to 5.25%.

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The GCF Repo Index ballooned to 6%.

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The US Treasury and Dollar Swaps curves remain … kinky.

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On the news, the Dow tanked over 160 points. Is the market signaling too little for the rate cut?

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The Crazy World of … Jerome Powell.

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Draghi Goes Big! Draghi Faced Unprecedented ECB Revolt as Core Europe Resisted QE (France, Germany Versus Spain, Italy, Greece)

This reminds me of the Mel Brooks skit “The people are revolting.”

It this case, it is France and Germany resisting more QE while “the people” (Spain, Italy and Greece) are revolting and pushing for more QE.

(Bloomberg) — European Central Bank governors representing the core of the euro-area economy resisted President Mario Draghi’s ultimately successful bid to restart quantitative easing, according to officials with knowledge of the matter.

The unprecedented revolt took place during a fractious meeting where Bank of France Governor Francois Villeroy de Galhau joined more traditional hawks including his Dutch colleague Klaas Knot and Bundesbank President Jens Weidmann in pressing against an immediate resumption of bond purchases, the people said. They spoke on condition of anonymity, because such discussions are confidential.

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Those three governors alone represent roughly half of the euro region as measured by economic output and population. Other dissenters included, but weren’t limited, to their colleagues from Austria and Estonia, as well as members on the ECB’s Executive Board including Sabine Lautenschlaeger and the markets chief, Benoit Coeure, the officials said.

Mario Draghi says the ECB will maintain a “highly accommodative stance of monetary policy.”

Such disagreement over a major monetary policy measure has never been seen during Draghi’s eight-year tenure. It casts a shadow over the resolve underpinning his parting stimulus shot before Christine Lagarde succeeds him, and also over his account of the proceedings. The extent of the rift might open the door to critics of the institution to question the legitimacy of its decisions.

Despite the disagreement, Draghi presented the decision to relaunch QE as having enough support to move forward. There was no vote on the matter, in line with typical ECB practice. Such a ballot would be a rare occurrence, but if one had taken place, under the Governing Council’s system of rotation to streamline decision-making, the French and Estonian governors would have been unable to cast a vote this month.

“There was more diversity of views on APP. But then, in the end, a consensus was so broad there was no need to take a vote. So the decision in the end showed a very broad consensus. As I said, there was no need to take a vote. There was such a clear majority.” 
– Mario Draghi, Sept. 12 press conference in Frankfurt

One key argument wielded by policy makers opposed to Draghi’s resumption of QE was that it would be better to save it to use as a contingency in an emergency, such as an abrupt outcome to Brexit if the U.K. leaves the European Union without a transition deal, the officials said.

Spokesmen and spokeswomen for the Austrian, Dutch, Estonian, French and German central banks declined to comment on the ECB discussions. An ECB spokesman also declined to comment.

QE has previously proved contentious. Draghi encountered significant opposition in 2015, when he pushed the Governing Council to start bond purchases, against the wishes of his German, Dutch, Estonian and Austrian colleagues.

Draghi’s decision to press ahead without such key support risks leaving Lagarde with a headache when she starts in November. She will need to decide whether to persist in a policy that has divided her Governing Council, risking further acrimony. The alternative would be to dial back the ECB’s current stimulus commitments, an approach that could provoke a market backlash.

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That’s what she said.

Seriously, how much extra QE does Spain, Italy and Greece want?

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Is it because their banking systems are still in the doldrums? Here is a sample of an Italian, Spanish and Greek bank.

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The Reasonabilists? Negative-yielding Debt Exceeds $17 TRILLION With Japan And France Leading In Negative-yield Issuance (Danish 10-year Fixed Mortgage Rates At -0.5%!)

It has been over 100 years since The Federal Reserve System was created by Congress in December 1913 and then signed into law by President Woodrow Wilson. Since its creation, the purchasing power of the US dollar for consumers has gone from $3.32 in December 1913 to $0.13 today.

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Virtually even nation has a central bank and together they have helped push down sovereign yields into negative territory in the amount of > $17 TRILLION.

The global stock of negative-yielding debt is now in excess of $17 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally.

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Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.

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France is the leader in Europe at $2.3 trillion in negative-yielding sovereign debt. France’s 10-year sovereign debt bears a coupon of 0.50% at €109.004 and a yield of -0.408%.

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Japan, of course, is the global leader in negative-yielding debt at $7.3 TRILLION.

Mortgage rates can be negative as well. Just ask the Danish bank Jyske Bank. Jyske is offering a 10-year fixed-rate mortgage (FRM) at … -0.5%.  Finland’s Nordea Bank is offering a 20-year FRM in Denmark at … 0%.

But wait! Who on earth would buy negative interest rate mortgage bonds? PIMCO, that’s who! 

But are negative mortgage rates reasonable? Or is Zorp the Surveyor approaching?

Zorp the surveyor.

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My Kuroda! Bank of Japan Cuts Bond Purchases In Effort To Stop Benchmark Yields From Falling To Record Lows (US Fed Starting QE4?)

My Kuroda!

Haruhiko Kuroda and the Bank of Japan are trying to stop plummeting Japanese yields.

(Bloomberg) — The Bank of Japan intensified its efforts to stop benchmark yields from falling to record lows by cutting bond purchases on Friday and then paving the way to reduce them further in the coming month.

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The central bank followed up on a 50-billion yen ($470 million) reduction in purchases of five-to-10 year debt this morning with a move to lower the buying range for this key maturity zone at its operations in September.

Speculation the BOJ would step in to halt the slide in yields was running highas the global debt rally caused the 10-year yield to drop further out of the central bank’s target range. Having come within one basis point of an all-time low of minus 0.3% on Thursday, the yield rose following BOJ’s actions on Friday, with that on similar-maturity U.S. Treasuries also moving higher.

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On the other side of the Pacific Ocean, the US Federal Reserve has reversed course on letting their Treasury Notes and Bonds mature (unwind) and are letting their System Open Market Account rise for the second week in a row. Is this the start of QE4??

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Kuroda and the Bank of Japan see no end in sight for plunging interest rates.

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Mortgage Purchase Applications Back To 1998 Levels As Mortgage Refi Applications Slow A Bit From Refi Wave

If you have recently applied for a mortgage refinancing given plunging mortgage rates, you may have noticed a delay in the underwriting. Why? US lenders are in the midst of a “refi wave” and some lenders are swamped with work, particularly underwriters.

Mortgage applications decreased 6.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 23, 2019.

The Refinance Index decreased 8 percent from the previous week and was 167 percent higher than the same week one year ago. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The unadjusted Purchase Index decreased 6 percent compared with the previous week and was 2 percent higher than the same week one year ago.

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The 30 year mortgage rate has been generally falling since November 2018 as European (Brexit) and Asian (China trade) pressures have increased. As a consequence, we have seen a “refi wave” in 2019.

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Mortgage purchase applications have risen gradually since 2014, but litigation against lenders and rules created under the Consumer Financial Protection Bureau (CFPB) resulted in mortgage purchase applications at 1998 levels.

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A refi wave can feel like surfing at Nazare in Portugal.

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US Home Price Growth Weakest In 7 Years (Phoenix Now Fastest Growing Home Prices, Seattle Home Prices Declining)

US national home price growth has slowed to its lowest level in 7 years, according to  June’s Case-Shiller report.

The decline in national home price growth coincides with The Fed’s decision to let its balance sheet self-unwind.

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Phoenix, my former residence, is now the fastest growing metropolitan area in the US, even faster than Las Vegas. Seattle is now the slowest growing metro area in terms of home prices and is actually declining. San Francisco is barely above 0% at 0.7% YoY.

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The FHFA purchase-only home price index YoY has fallen to 1.0.

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Time for some more “Fed Fresh” spray?

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Come Dancing? US Treasury Considering Issuing 50- or 100-year Bonds As 30-Year Treasury Bond Yield Hits All-time Low (Negative Yielding Debt Growth Sends Gold Skyrocketing – 14 European Countries Have Negative 10-year Yields)

As the US House of Representatives (that controls the purse strings of the Federal government) escalates spending, the US Treasury has to issue more debt. In fact, the US has now exceeded the 100% debt to GDP that was first exceeded back in 2012 in the wake of the financial crisis.

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And with the US Treasury 30-year yield hitting all-time lows,

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Treasury is exploring longer-term maturities to refinance its debt and issue additional debt to cover the Federal budget deficit.

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(Bloomberg) — With interest rates on 30-year U.S. debt hitting all-time lows this week, the US government is once again considering whether to start borrowing for even longer.

The U.S. Treasury Department said Friday that it wants to know what investors think about the government potentially issuing 50-year or 100-year bonds, going way beyond the current three-decade maximum.

Well, US dollar swaps go out to 50 years, so 50-year Treasuries are not that much of a leap.  But can we try 40 years first??

But given the unusual shape of the Treasury and Swap curves (both inverted in the short-term), is this Fed-caused disturbance in the yield curve or a signal of recession in the coming 5 years.

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And as global negative yielding debt explodes, so does gold prices.

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Its the same all over the world in terms of negative yields.

In fact, 14 European nations have negative 10-year yields.

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