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Maxing Out

Published on September 25, 2023 by Premium

The Treasury market may be entering a period of volatility as leveraged investors have stalled in their purchases and the next marginal buyer has not yet arrived. When the Fed and commercial banks stepped away from the Treasury market, hedge funds stepped in and bought cash Treasuries in size as part of a cash futures basis trade. The financing for that trade is sourced through dealer repo, which grew rapidly and then stalled. While dealers

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Liquidity Event

Published on September 18, 2023 by Premium

The potential for a replay of a March 2020 liquidity event in markets is on the rise as the rate of growth of debt continues to far exceed growth in the market's capacity to provide liquidity. The latest Fed financial accounts data show that dealer warehousing capacity has trended higher but still remains notably below GFC levels seen over a decade ago. At the same time, the level of corporate bonds, Agency MBS, and Treasuries

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Outlagging the Rest

Published on September 11, 2023 by Premium

The dollar looks to strengthen as the lagged impacts of monetary policy weigh on other major economies and compel their central banks to relent first in their restrictive policies. Economic growth abroad appears to be faltering as higher rates reduce disposible income via higher mortgage rates and also reduce the availability of bank credit. At the same time, the U.S. economy continues to grow above trend and even potentially at an accelerating pace. The U.S.'

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Dollar Deleveraging

Published on September 5, 2023 by Premium

Higher dollar interest rates appear to be prompting a deleverging of the off-shore dollar banking system that that may presage an extended period of poor global growth. Unlike domestic banks, foreign banks do not have a broad retail dollar deposit base and must fund their dollar assets at money market rates. The squeeze on bank profitability seen in smaller domestic banks is thus magnified for foreign banks and appears to be contributing to a reduction

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Adrift at Sea

Published on August 28, 2023 by Premium

A couple key assumptions that underpin the interest rate views of some market participants are potentially shifting higher. Standard macroeconomic thinking views nominal interest rates as in part determined by the central bank's perceived neutral rate ("r*") and it's inflation target. There is growing discussion that both the neutral rate has risen and that the Fed's inflation target should be higher. The possibility of such a shift would likely impact the investment decisions of some

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Steepening Stance

Published on August 21, 2023 by Premium

The Fed is guiding towards rate cuts next year while also continuing QT, which together imply a steepening influence on the curve. Fed officials have begun signaling modest rate cuts to prevent real interest rates from rising even as the rate of inflation trends downward. At the same time, a number of Fed officials are considering breaking from tradition and maintaining QT even amidst rate cuts. This is happening even as supply and demand dynamics

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Credit Normalization

Published on August 14, 2023 by Premium

Credit quality across the major segments of U.S. debt markets are solid and corroborate on-going economic strength. Lenders across capital markets, commercial banks, and private credit broadly indicate a slight deterioration in quality that is best understood as normalization from historically benign conditions. This is also reflected in a slight tick upwards in bankruptcy filings towards filing rates prevailing before 2020. Persistently high nominal economic growth suggests the benign conditions will continue as corporate cashflows

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Dealer of Second to Last Resort

Published on August 7, 2023 by Premium

The Treasury's new buyback program will have a humble beginning, but tremendous potential to become an essential tool with far reaching impact. Treasury first hinted at a buyback program last August amidst concerns over poor Treasury market liquidity and finally decided to launch it next year. The most recent details indicate modest buyback amounts to both improve Treasury market liquidity and help the U.S. better manage its cash holdings. Treasury has explicitly dismissed any intention

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Raising Anchor

Published on July 31, 2023 by Premium

The Bank of Japan's new flexible approach towards Yield Curve Control relaxes a significant anchor of global yields and smooths a path for yields to drift higher. Japanese investors have built up significant positions in overseas bonds over the years in their search for higher yields and in the process helped link global bond markets together via relative value trades. A wide range of Japanese investors actively invest in overseas sovereign and corporate bonds, both

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Asset Neutral

Published on July 24, 2023 by Premium

Net interest margins for many banks remain healthy, but have notably shrunk as deposit funding costs rose more quickly than anticipated. The first aggressive hike cycle in decades is revealing widely held assumptions on deposit behavior to be false. The surprising rate sensitivity of deposits appears to be due to both aggressive loan growth in the preceeding years, as well as a persistent reduction in system wide deposits via quantitative tightening. However, the largest banks

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