Blog Posts

Shake it Off

Published on April 22, 2024 by Premium

The equity markets appear to be frightened by the sudden rise in interest rates, but even a 5% 10 year yield does not necessarily preclude an on-going rally. Common frameworks that link the level of interest rates with equities such as the equity risk premium sound reasonable, but have not been useful in practice. A brief glance through history and across the world shows that high equity prices can coincide with high interest rates, which

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April Tax Drain

Published on April 15, 2024 by Premium

This post explains the mechanics behind the annual April tax drain and why it sometimes impacts funding markets. Federal income taxes are collected quarterly for businesses, but most individual taxpayers pay their annual income taxes on April 15th. This means that as much as several hundred billion in funding is shifted around in the financial system in a short period of time. While the event is well telegraphed, it can have impacts on funding markets

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Employment Pivot

Published on April 8, 2024 by Premium

The Fed is shifting its reaction function on employment such that strong job growth numbers will no longer elicit a hawkish monetary response. Chair Powell had previously sought to lower inflation by dampening wage growth, which was to be done by raising unemployment. In that framework, strong job gains would suggest the need for tighter policy. But Powell now indicates that the tremendous surge in migration will increase labor supply and moderate wage growth without

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The Sequence

Published on April 1, 2024 by Premium

The decline in RRP balances looks to slow in the coming months, which suggests the upward pressure in money market rates necessary to end QT will not appear until early 2025. Chair Powell strongly hinted at an imminent QT taper, but noted that QT would continue until signs of reserve scarcity emerge. Fed officials widely look to upward pressure in overnight rates as a key indicator for scarcity. The sequence from 2018 was first an

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Synchronized Easing

Published on March 25, 2024 by Premium

A synchronized easing cycle in the context of declining inflation creates further upside risk for all risk assets. Developed market central banks are set to cut rates in the coming months, and the impact of their easing may be greater than the sum. Banks and investors hold portfolios across jurisdictions and their risk appetite may further rise as they see their entire portfolio inflate. In addition, major central banks are set to cut rates due

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Importing Shelter Inflation

Published on March 18, 2024 by Premium

The Biden Administration's immigration policy is likely increasing demand for shelter, which is putting upward pressure on inflation and reducing the prospect of future cuts. Shelter inflation accounts for around 30% of CPI and was widely anticipated to slow or even fall into outright deflation. But the entry of an estimated 3.3 million migrants in 2023 is likely creating demand for housing that is frustrating those forecasts. A similar inflationary impact has also been observed

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Manufacturing Demand

Published on March 11, 2024 by Premium

Tweaking regulations to encourage more bank involvement would be an easy private sector solution to financing the anticipated surge in Treasury issuance. While Fed purchases are the ultimate backstop to any market, a modest adjustment to Basel III leverage calculations would save them the trouble. Capitalizing on the deep unpopularity of proposed regulations, ISDA is recommending a permanent exemption of Treasuries from Basel III leverage calculations. This simple change would boost liquidity across markets and

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Normalizing Composition

Published on March 4, 2024 by Premium

Governor Waller kicked off a post-QT discussion by proposing to increase the share of bills in the Fed's Treasury portfolio, a significant change that in effect extends QT beyond its official end date. Fed holdings of bills have varied significantly over the years, from a third of their Treasury portfolio pre-GFC to below 5% today. Waller suggests that the shift would reduce Fed operating losses and offer more flexibility in the event of future asset

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Recycling Money

Published on February 26, 2024 by Premium

A structurally large fiscal footprint is a strong tailwind for credit as it is likely to keep nominal GDP growth elevated for the foreseeable future. Fiscal spending recycles money by taking from those who are less likely to spend and giving to those who are more likely to spend. In practice, the Federal government is largely funded by a small fraction of high income earners and increasingly from wealthy investors. The recipients of its expenditures

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Higher (Real Rates) For Longer

Published on February 20, 2024 by Premium

The recent bout of higher inflation prints and resurgent labor market strength changes the timing and number of rate cuts, but does not change the direction of monetary policy. Fed officials note the risks between their employment and inflation mandates are more balanced, so they are increasingly mindful of potential overtightening. Fed officials have widely articulated a framework that views policy through the lens of real interest rates and a neutral rate that is little

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