Fed’s Key Rate Edging Closer to Top of Band as Repo Rates Surge (Fed Considering Allowing Banks To Repo Treasurys For Reserves To Reduce Regulatory Burden)

I am still laughing over Fed-nominee Stephen Moore calling Ohio “the armpit of America.” But I wonder what Moore has to say about the idea of a new Fed quantitative easing scheme: 

Federal Reserve officials are considering a new program that would allow banks to exchange Treasurys for reserves, a move aimed at ensuring liquidity during difficult times that also would help the central bank decrease the size of its nearly $4 trillion balance sheet.

The so-called standing repo facility is in its early discussion phases. Respected St. Louis Fed economists David Andolfatto and Jane Ihrig have authored two papers on the plan, which they say would ease the regulatory burden for banks that feel pressured into holding ultra-safe assets.

And on the repo front!

(Bloomberg) — U.S. short-term interest rates are on the rise again as a result of month-end funding dynamics.

Borrowing costs in one of the key U.S. funding markets soared on the final trading day of April, with the rate on overnight general collateral repurchase agreements climbing to levels unseen since the end of the first quarter. The rate reached around 2.88 percent in early New York trading hours, up from roughly 2.57 percent on Monday, ICAP data show.

The benchmark targeted by the Federal Reserve in its implementation of monetary policy is also continuing to tick higher, with the effective fed funds rate rising to 2.45 percent on Monday, according to central bank data released Tuesday.

Repo rates typically move higher at the end of the month as some dealers curtail activity in the financing markets to shore up their balance sheets. Adding to the upward pressure is a potential influx of additional collateral, with settlements on Tuesday for around $235 billion in new Treasury bills and coupon-bearing securities. On top of that, recent outflows from government money-market funds means there’s been less cash to lend in the repo market, which could also be contributing to elevated rates.


The move in repo may be helping to drive up the effective rate for the central bank’s benchmark because it can draw some lenders away from fed funds and into the more attractive rates offered by the secured market. The effective fed funds rate has already moved well above the central bank’s interest on excess reserves rate — a level that’s historically acted as a cap for the benchmark and currently stands at 2.40 percent — prompting questions about a possible response from policy makers. While it’s still within the Fed’s overall target range for fed funds of 2.25 percent to 2.50 percent, it is creeping higher within that band.

The increase in the repurchase agreement rate is also likely to have a knock-on effect for the Secured Overnight Financing Rate, the repo-linked heir presumptive to the London interbank offered rate.


The Fed is also considering NEGATIVE Fed Funds rates (which have not helped Japan and Europe). This reeks of … Frank Booth in Blue Velvet.


US Core Inflation Falls To 1.55% YoY Ahead Of Fed FOMC Meeting (0% Probability Of A Rate Hike With A Downward Sloping Forward Curve)

Is the US slippin’ into darkness? It is, according to core inflation slipping to 1.55% YoY compared to The Fed’s target rate of 2.0%.


Declining core inflation translate to a flattening Treasury curve.


And a tanking volatility cube at the short-end.


The expectation for a rate hike on May 1st is … 0!


But the forward curve (orange line) for Fed funds rates is decidedly downward sloping.


Let’s see if Fed Chair Jerome Powell signals economic optimism for the US while the market is signaling slowdown.


Thanks to Jesse at Jesse’s Cafe Americain!

Criss-Cross! US Advance Q1 GDP Rises To 3.2%, But Personal Consumption Falls To 1.2%

Today’s economic report reminds me of the Hitchcock flick “Strangers on a Train.” Criss-cross, two seemingly unrelated factors — 3.2% GDP growth with falling Personal Consumption growth.

(Bloomberg) — U.S. economic growth accelerated by more than expected in the first quarter on a big boost from inventories and trade that offset a slowdown in consumer spending, bolstering hopes that growth is stabilizing after its recent soft patch.

Gross domestic product expanded at a 3.2 percent annualized rate in the January-March period, according to Commerce Department data Friday that topped all forecasts in a Bloomberg survey calling for 2.3 percent growth. That followed a 2.2 percent advance in the prior three months.


The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased. These contributions were partly offset by a decrease in residential investment.

The acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports, which are a subtraction in the calculation of GDP, turned down.


On the positive US news, global sovereign bond prices rose and yields declined. Mostly due to disappointed economic news from China.


Yes, the tax cuts helped speed up the economic merry-go-round, but the tax cuts are not seemingly translating to personal consumption.



Raw Oyster Stew! BoJ’s Kuroda Says That There Is Room For Interest Rate Reduction (The Swiss Miss?)

Much like the Three Stooges bit “Raw Oyster Stew”,  using Central Banks to stimulate a structurally flawed economy is like Curly trying to eat the raw oyster.

(Reuters) – Bank of Japan Governor Haruhiko Kuroda told CNBC that there is room for reducing long-term and short-term interest rates.

“I think there (is) still some room for further monetary easing if needed,” he said, adding that it isn’t necessary at this stage.

Kuroda also said that the Japanese economy has “slightly slowed down”, partly because Japan’s exports to China have become “somewhat” weak.

Yes, Kuroda can try to push Japanese sovereign rates lower. The benchmark for low interest rates is … Switzerland. (Aka, The Swiss Miss!)


Swaps? Yen versus Franc swap rates:


So, Kuroda is suggesting a Swiss put on rates. Or a Swiss Miss!


My Kuroda!!  

Liquifying The S&P 500! Central Bank Money Printing Sends S&P 500 Skyrocketing

So much for market discipline.  In fact, central bank intervention kills-off market discipline, a vital component of free markets.

However central banks are not concerned with market discipline. They are concerned with perpetuating asset bubbles.




“The Sag” In The US Sovereign And Dollar Swaps Curve Continues, But Germany, UK And Japan Curves Are Sagging Too!

It’s the same all over the world.

The US Treasury actives curve and dollar swaps curves are markedly sagged (or kinked).


But other countries are experiencing curve sags as well, but just not as pronounced. Germany, Japan, UK and France are all sagging, but less notably.


Numerous risks abound in the global economy such as Brexit, China trade disagreement, etc.

On the other hand, there is Venezuela which has entered a seemingly permanent sag.


And the SAG award goes to … the USA for short-term SAG.


The permanent SAG award goes to …. Nicolas Maduro and Venezuela.


Broken Arrow! U.S. Treasury Yield Curve Inverts for First Time Since 2007

Since an inverted Treasury curve occurs before a recession, the Federal Reserve may have to expend all remaining policy tools.

The US Treasury 10-year yield declined 10 bps today which is a large pop.


The Federal Reserve finally achieved an inverted Treasury yield curve for the first time since 2007.


The Federal Reserve, in the past, has reacted aggressively when the yield curve slope breached 0 slope. Aka, Snake and Nape (Snake Eye Missiles and Napalm).

It’s been a lovely *%*$#$$  non-recovery from the last recession. Just asset bubbles.



Fed’s Powell Turns Dove And Throws In The Towel As Yield/OIS Curves Remain Kinked

With a projected slowing economy and core inflation still under 2%, Fed Chair Jerome Powell officially threw in the towel on monetary normalization yesterday by announcing  no more rate increases this year and balance sheet reduction will cease in September.


The US Treasury Actives curve remains kinked from 6 months to 10 years reflecting economic slowdown. The overnight indexed swap curve is hyper-kinked.


A closer look at the US  Overnight Indexed Swap rate flattened after The Fed’s last rate hike, signaling that there be no more in the short run.


One can view Powell as Mean Mr. Mustard (and Yellen as Polythene Pam), the surrender on monetary normalization is welcome by equity markets and mortgage lenders.


An Occurrence At The Federal Reserve: Increased SMART Money & Equity Volatility, Crushed Bond Volatility

Ambrose Bierce wrote a short story about a man being hanged during the American Civil War and what went through his mind in his final moments. It is called “An Occurrence At Owl Creek Bridge.” Hauntingly similar to today’s plight: overoptimistic expectations before being hung, then …. snap.

In summary., Ben Bernanke and The Federal Reserve entered the markets in 2008 in force. The Fed Funds Target rate was raised once during President Obama’s two terms as President, but eight times since President Trump’s election as President. Plus, The Fed’s Quantitative Tightening (in terms of its balance sheet) begin in earnest in 2019.

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Once The Fed hurled its monetary weight at the economy in 2008, the stock market had an amazing run. but since The Fed started to raise rates and began their balance sheet unwind, the S&P 500 index has increased in volatility as has the SMART Money Flow Index.


The bond market volatility indices have gotten crushed by central banks.


On the real estate front, equity REITs, like the small cap Russell equity indices, seemed to be benefit greatly from The Fed’s Zero Interest Rate Policy and QE. Mortgage REITs, on the other hand, kind of died with the financial crisis and never recovered. The RCA CPPI commercial real estate index too off like a missile.


Like in the Ambrose Bierce short story “An Occurrence At Owl Creek Bridge,” The Fed and other central banks are quitting any attempts at rate normalization (for fear that they might hear that dreaded “snap” at the end of the monetary rope].

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