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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Gold Rising

Published on May 13, 2024 by Premium

The surprising surge in gold prices appears in part due to a structural shift in sovereign reserve allocation that looks to continue for years. The rise in gold prices is happening amidst a relatively strong dollar and multi-decade highs in real interest rates, suggesting the emergence of a new driver of prices aside from traditional macro factors. A recent study from the IMF finds evidence of an ongoing decoupling of global trade and global financial

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Another Path

Published on May 6, 2024 by Premium

Higher than expected inflation raised the Fed's expected rate path, but the recent softening in the labor market is opening up another path to earlier and more frequent rate cuts. A wide range of indicators suggest that the demand for labor is softening even as the supply of labor is increasing by the millions through migration. Business surveys are showing a decline in demand for labor, while job postings are also moderating towards pre-pandemic levels.

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Chair Trump

Published on April 29, 2024 by Premium

A potential Trump Administration looks to fundamentally change the framework of monetary policy by taking a greater role in setting both interest rates and foreign exchange policy. This would be a break from current norms and mark a return to a prior era. The Treasury has set FX policy since the 1934 Gold Reserve Act, though it has not meaningfully exercised that power in recent decades. The Fed has managed interest rates since the Treasury-Fed

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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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