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Extra Capital

Published on July 22, 2024 by Premium

A stagnant demand for bank loans along with moderate economic conditions appears to be encouraging banks to deploy more of their balance sheet into activities that are supportive of the Treasury market. Overall bank loan growth has essentially ground to a halt with only select segments showing growth. However, credit quality remains solid and delinquencies appear to have normalized to pre-pandemic ranges. This has have left banks with excess balance sheet capacity that they are

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Local Currency Returns

Published on July 15, 2024 by Premium

A Trump victory sounds like a straightforward case for a rally in risk assets, but it comes with a notable risk. President Trump has been open with his intention of running loose fiscal policy, lowering rates and weakening the dollar. While this is a very bullish combination for a U.S. based investor, it amounts to a promise of negative returns to a foreign investor. Trump may not enact all his intended policies, but a dollar

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Long Live the Dollar

Published on July 8, 2024 by Premium

U.S. Treasury data indicates there is very strong foreign demand for Treasury securities despite perceived concerns of sanctions and the unsustainable fiscal trajectory. Foreign Treasury holdings data are difficult to parse because they fluctuate in part due to changes in market valuation, but the a new dataset containing net transactions provides a clear read on foreign demand. Foreign investors over the past year purchased $700b in longer dated Treasuries, an amount that is close to

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Diversification Constraints

Published on July 1, 2024 by Premium

The narrow rally in the stock market seems to be intersecting with mutual fund diversification rules in a way that provides ongoing market support. The bulk of the gains in the major stock market indexes this year have come from companies involved in AI, while other companies have largely languished. This has increased the concentration of benchmark indexes and made it more difficult for active managers operating under diversification rules to outperform. Recent analysis from

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Creating Shortages

Published on June 24, 2024 by Premium

Higher interest rates appear to be negatively impacting the supply of housing and paradoxically pushing the achievement of the 2% inflation target further into the future. The last mile of above target inflation is largely due to elevated shelter inflation, which remains above its pre-pandemic pace. Higher interest rates may be decreasing the supply of housing even as the demand for housing is increasing from millennials and migrants. Market pricing and Fed balance sheet policy

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French Connection

Published on June 17, 2024 by Premium

The large role French banks play in dollar funding markets provides a direct avenue where turmoil in France can leak into dollar assets. French markets have exhibited a slight but discrete increase in risk premia in response to the sudden change in its political landscape. At the same time there has been a slight rise in rates in certain key dollar funding markets. This post shows the increase in credit risk in French markets, illustrates

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Less Restrictive

Published on June 10, 2024 by Premium

A rising unemployment rate sets the stage for the Fed to join other global central banks in moderating its degree of policy restrictiveness. This past week both the Bank of Canada and ECB cut by 25bps noting progress on inflation, but also emphasizing that their stance of policy remains restrictive. The tremendous post-pandemic surge in inflation has waned, so there is no need for rates to be at multi-decade highs. The same story is playing

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No Signs of Scarcity

Published on June 3, 2024 by Premium

The Fed's most recent Senior Financial Officer Survey clarifies a couple of important signposts that will guide the Fed in managing the end of quantitative tightening. The SFOS is a periodic survey of bank executives on how they manage their reserve levels. The most recent survey revealed the spreads to interest on reserves required by banks to substitute reserves for comparable assets, an action commonly associated with reserve scarcity. The survey also shows which markets

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Crypto Rebalancing

Published on May 28, 2024 by Premium

The recent change in political winds is a positive catalyst for crypto prices that can also spillover into other asset classes as crypto investors rebalance their gains. While crypto is an opaque asset class, researchers have been able to piece together a picture of crypto investor behavior from a comprehensive dataset of bank account data. Compared to non-crypto investors, crypto investors are inclined to chase upward price action and consume a relatively large share of

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Unlocking Home Equity

Published on May 20, 2024 by Premium

Freddie Mac's proposal to purchase second mortgages can potentially unlock up to $1.8t in lending to a vast swath of homeowners. Freddie has long supported the U.S. housing market by buying first mortgages, transforming them into Agency MBS and then selling them to investors. Freddie is now thinking of also expanding this business to second mortgages, which is a mortgage taken out in addition to the first mortgage. This would make it easier for homeowners

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