Another unintended consequence of government involvement in financial markets - sudden shortage of T
COINB0Y
Posts: 4,505
WSJ - April 5th, 2011
The money market has been roiled by a sudden shortage of Treasury securities, another unintended consequence of government involvement in financial markets.
The disappearance of Treasurys in recent days has created a scramble among banks and investors, who depend on a fluid supply for short-term borrowing and lending. It is an unusual event, considering the market is generally awash in Treasurys, with about $9 trillion outstanding.
But recent rule changes mandated by the Dodd-Frank laws have made it too expensive for some banks to offer out their Treasurys holdings as part of a key overnight lending market known as the repurchase or "repo" market.
Banks typically borrow in this market, using Treasurys as collateral, parking the cash with the Federal Reserve and earning a better interest rate. Investors and money market funds use the market to lend out their cash overnight and earn a small return.
The lack of supply was so severe on Monday, and some investors so desperate for Treasurys, that they accepted negative yields—effectively paying to lend money to the banks. That is something that has rarely been seen since the financial crisis.
Exacerbating the problem, the Treasury has stopped selling some short-term Treasurys amid the debate in Washington over the government debt ceiling. At the same time, the Federal Reserve is suctioning up most of the new Treasurys that the government is selling, adding to the shortage of Treasury supply.
"It is a perfect storm of collateral being pulled from the market when it is most needed," said Thomas Roth, executive director in the U.S. government bond-trading group at Mitsubishi UFJ Securities (USA) Inc. in New York.
Joseph Abate, money-market strategist at Barclays Capital, noted that about $40 billion in repo collateral abruptly disappeared on Friday, in what traders said was one or more big banks exiting the market.
Banks have pulled back on their repo activity since the Federal Deposit Insurance Corp. imposed an added charge on bank repos as of April 1.
The new assessment was designed to better reflect the risks on individual banks' balance sheets by charging them for liabilities, including repo-market activities, instead of just their deposits.
An FDIC spokesman declined to comment on the market impact.
The average interest rate investors receive for lending Treasury debt in that market have fallen to nearly zero from about 0.15% since the end of March, according to Scott Skyrm, head of repo trading at Newedge USA in New York.
Rates have been ratcheting lower for some time, making the money market "an ever-worsening house of pain," Anthony Crescenzi, portfolio manager at Pacific Investment Management Co., or Pimco, wrote in an email.
So far, the tensions in the markets have been mild compared with the 2008 financial crisis, when the money market essentially seized up.
Still, the decline of repo rates, if it lasts very long, could be bad news for money-market funds that make money by lending Treasurys to banks and other investors.
There is an outside chance that long-term disruption of the repo market, a key source of funding for many corners of the economy, could eventually lead to higher borrowing costs more broadly.
Most think the turmoil will be temporary, and the Fed would likely intervene before too much damage was done.
"I think the market has overreacted here a bit and will probably go back to its equilibrium level," Mr. Abate said. "I'm just not sure how quickly."
It is possible that the market could be in some upheaval at least until the resolution of the debate in Congress over the U.S. government's debt ceiling.
That is because a shortage of available Treasurys for use as repo collateral seems to be a major factor driving repo rates lower.
That Treasury shortage, in turn, is partly due to some short-term Treasury debt issuance being on hold until the debt-ceiling issue is settled.
For now, the government is probably not complaining about the shortage of Treasurys, which is driving its borrowing costs lower for now. Prices on Treasury debt have risen sharply since Friday, driving yields—which move in the opposite direction—lower.
The six-month Treasury bill's yield fell to a low of 0.122%, a record, on Monday.
Late afternoon, the benchmark 10-year note was 5/32 higher to yield 3.429%. The two-year note rose 2/32 to yield 0.774%.
At the same time, the repo market is flooded with cash being pumped by the Fed in an effort to goose the economic recovery. One possible solution for the current turmoil is for the Fed to stop buying, and even start lending out, some of its Treasurys.
But that would send mixed signals to the market while the Fed is still in the middle of its $600 billion Treasury buying program.
The Fed would likely rather deal with some short-term turmoil in the repo market than work against its own liquidity measures. And part of the Fed's intention with its liquidity pumping programs has been to make it more painful for investors to stay in cash, forcing them to buy riskier assets.
Write to Mark Gongloff at mark.gongloff@wsj.com and Min Zeng at min.zeng@dowjones.com
The money market has been roiled by a sudden shortage of Treasury securities, another unintended consequence of government involvement in financial markets.
The disappearance of Treasurys in recent days has created a scramble among banks and investors, who depend on a fluid supply for short-term borrowing and lending. It is an unusual event, considering the market is generally awash in Treasurys, with about $9 trillion outstanding.
But recent rule changes mandated by the Dodd-Frank laws have made it too expensive for some banks to offer out their Treasurys holdings as part of a key overnight lending market known as the repurchase or "repo" market.
Banks typically borrow in this market, using Treasurys as collateral, parking the cash with the Federal Reserve and earning a better interest rate. Investors and money market funds use the market to lend out their cash overnight and earn a small return.
The lack of supply was so severe on Monday, and some investors so desperate for Treasurys, that they accepted negative yields—effectively paying to lend money to the banks. That is something that has rarely been seen since the financial crisis.
Exacerbating the problem, the Treasury has stopped selling some short-term Treasurys amid the debate in Washington over the government debt ceiling. At the same time, the Federal Reserve is suctioning up most of the new Treasurys that the government is selling, adding to the shortage of Treasury supply.
"It is a perfect storm of collateral being pulled from the market when it is most needed," said Thomas Roth, executive director in the U.S. government bond-trading group at Mitsubishi UFJ Securities (USA) Inc. in New York.
Joseph Abate, money-market strategist at Barclays Capital, noted that about $40 billion in repo collateral abruptly disappeared on Friday, in what traders said was one or more big banks exiting the market.
Banks have pulled back on their repo activity since the Federal Deposit Insurance Corp. imposed an added charge on bank repos as of April 1.
The new assessment was designed to better reflect the risks on individual banks' balance sheets by charging them for liabilities, including repo-market activities, instead of just their deposits.
An FDIC spokesman declined to comment on the market impact.
The average interest rate investors receive for lending Treasury debt in that market have fallen to nearly zero from about 0.15% since the end of March, according to Scott Skyrm, head of repo trading at Newedge USA in New York.
Rates have been ratcheting lower for some time, making the money market "an ever-worsening house of pain," Anthony Crescenzi, portfolio manager at Pacific Investment Management Co., or Pimco, wrote in an email.
So far, the tensions in the markets have been mild compared with the 2008 financial crisis, when the money market essentially seized up.
Still, the decline of repo rates, if it lasts very long, could be bad news for money-market funds that make money by lending Treasurys to banks and other investors.
There is an outside chance that long-term disruption of the repo market, a key source of funding for many corners of the economy, could eventually lead to higher borrowing costs more broadly.
Most think the turmoil will be temporary, and the Fed would likely intervene before too much damage was done.
"I think the market has overreacted here a bit and will probably go back to its equilibrium level," Mr. Abate said. "I'm just not sure how quickly."
It is possible that the market could be in some upheaval at least until the resolution of the debate in Congress over the U.S. government's debt ceiling.
That is because a shortage of available Treasurys for use as repo collateral seems to be a major factor driving repo rates lower.
That Treasury shortage, in turn, is partly due to some short-term Treasury debt issuance being on hold until the debt-ceiling issue is settled.
For now, the government is probably not complaining about the shortage of Treasurys, which is driving its borrowing costs lower for now. Prices on Treasury debt have risen sharply since Friday, driving yields—which move in the opposite direction—lower.
The six-month Treasury bill's yield fell to a low of 0.122%, a record, on Monday.
Late afternoon, the benchmark 10-year note was 5/32 higher to yield 3.429%. The two-year note rose 2/32 to yield 0.774%.
At the same time, the repo market is flooded with cash being pumped by the Fed in an effort to goose the economic recovery. One possible solution for the current turmoil is for the Fed to stop buying, and even start lending out, some of its Treasurys.
But that would send mixed signals to the market while the Fed is still in the middle of its $600 billion Treasury buying program.
The Fed would likely rather deal with some short-term turmoil in the repo market than work against its own liquidity measures. And part of the Fed's intention with its liquidity pumping programs has been to make it more painful for investors to stay in cash, forcing them to buy riskier assets.
Write to Mark Gongloff at mark.gongloff@wsj.com and Min Zeng at min.zeng@dowjones.com
0
Comments
Heck, my toes hurt after reading that.....
Camelot
Making it any harder for RE to transfer is not good right now.
I wonder how much input was given by the mortgage industry--but I suspect little if any was listened to. The industry is not held in ....ahem...the highest regard these days.
I suppose the response will be to print more of them.
$900 BILL of them out there somewhere. Not much different than MS63-64 slabbed Morgan silver dollars. Over 1 MILLION of them
graded. But see what trying to get 50,000 of them does to the prices. They are spread far and wide. Real currency, bullion, treasuries, coins, etc.
are in relatively short supply when measured against all the keystroke trading that goes on with them. Some of these markets are using 100-1
leveraged paper vs. the actual asset. If all of sudden everyone decides they want it in hand, the swhtf.
Now it's got something to do with PM's/coins.
roadrunner
That was my thought as well, but my reaction was a bit different.
I knew it would happen.
i haven't cracked my WSJ today....and may not have....thanks COINBOY
<< <i>One of the consequences of this DODD-FRANK bill is that home mortgages are going to start getting a lot harder to get.
Making it any harder for RE to transfer is not good right now.
I wonder how much input was given by the mortgage industry--but I suspect little if any was listened to. The industry is not held in ....ahem...the highest regard these days. >>
I know little of Dodd-Frank but one odd consequence of the RE crisis is that Chase Bank quite out of the blue has offered to refinance my existing mortgage from 5.875% to 4.25% fixed. They are paying all the closing costs to boot. They mentioned the HARP program and some government initiative. It all seems legitimate. Here I thought all the programs were meant to help struggling homeowners. This is a case where someone who does not need to get a break is getting one.
Go figure.
https://www.pcgs.com/setregistry/gold/liberty-head-2-1-gold-major-sets/liberty-head-2-1-gold-basic-set-circulation-strikes-1840-1907-cac/alltimeset/268163
<< <i>I can see a shortage of treasuries. Try to go out and find FRN's in quantity. You probably can't. And neither can the banks. But there are
$900 BILL of them out there somewhere. Not much different than MS63-64 slabbed Morgan silver dollars. Over 1 MILLION of them
graded. But see what trying to get 50,000 of them does to the prices. They are spread far and wide. Real currency, bullion, treasuries, coins, etc.
are in relatively short supply when measured against all the keystroke trading that goes on with them. Some of these markets are using 100-1
leveraged paper vs. the actual asset. If all of sudden everyone decides they want it in hand, the swhtf.
Now it's got something to do with PM's/coins.
roadrunner >>
Well said.
The Timebomb is ticking.
Free Trial
I knew it would happen.
<< <i>Good observation, roadrunner. It hadn't occurred to me that T-Bill collectors might someday want physical. Yikes.
CU Ancient Members badge member.
Collection: https://flickr.com/photos/185200668@N06/albums
No, but I searched that name and it appears that Jim Comiskey is a gold & silver market strategist at Lind Waldock. He links to Richard Russell, which tells me that we may have something in common in the way we look at investing. I just watched some of one of his utube commentaries, and he is focused on the technical side, i.e. trading - because that's his job. But I'd also venture to say that he's a believer in fundamentals. My attitude is that the fundamentals haven't been this strong for the metals since about........................um, never in my lifetime. The '70s had strong fundamentals for the metals, but today's reasons are stronger.
Regretably, that's not particularly good news unless you're loaded to the gills with metals.
I knew it would happen.
The maturities are different, but they also are in fact the pathway that allows debt to be monetized. The short term Treasuries are pretty much same as cash in terms of liquidity, and as the length of the maturities stretch out, the degree of liquidity decreases while the discounting of the face value increases.
Monetizing of the debt. Debt = Money. Doesn't anyone find that wierd when you really sit down and think about it?
The more I owe, the more money I have? That only works if you happen to be the federal government or one of their preferred contractors, i.e. a large bank or the banking cartel.
Rules & Regs for the Individual <--- Rules & Regs for the Banking System <--- Rules & Regs for the Federal Government
It appears that "you know what" only flows downhill.
I knew it would happen.
I've always had a problem with that concept. I understand it when someone explains it but it still seems very contrary. That is a tool of the banksters and it works for the financial world. For us common guys it equates to buying a house and owing 100K on it. Your net worth has risen 100K once you sign the papers so you can borrow new money because you now have a higher net worth...BUT YOU OWE 100K? If you are a bank and you loan someone 100K then you can count that as assets and loan 10X that because your assets have increased 100K...HUH? Well, I still like having hard cash or PM's instead of debt but that's just me I guess.
<< <i>This discussion seems to have gone off the rails. Treasury bonds and Federal Reserve Notes are completely different. The Treasury issues bonds to finance govenment debt, which are sold to places like China in huge amounts. That's different from the little pieces of paper in your pocket that say "Federal Reserve Note." >>
Each of them is on the Rubik's cube of debt. If anything, the FRN's are dearer since they exist in much smaller quantities and are immediately negotiable (for now) for purchases. Try
buying lunch with your TBond. But sovereign debt is still debt regardless of how it is packaged.
roadrunner
If I'm a bank, I say "just make me 10 copies, please".
Then, I start handing out the 10 copies of my debt (promissory note) to anyone who will accept it as $100,000 in money.
Seems fair to me.
I knew it would happen.
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
<< <i>"unintended "
LOL! U are right! Nothing they do is that, is it?
<< <i>Treasury Dept ---> T-Bonds ---> T-Notes ---> T-Bills ---> Fed ---> FRNs ---> Joe Blow >>
Is that something like this? Water ---> Ice ---> Popsicles ---> Humans?
I just kidding, of course. But they are quite different, even if they have some relationship to each other.