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 …
Tag: financial plumbing
Published on September 18, 2023 by Joseph Wang 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 …
Published on August 7, 2023 by Joseph Wang 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 …
Published on July 17, 2023 by Joseph Wang Premium
The Treasury successfully replenished the Treasury General Account with minimal market disruption by draining the RRP through aggressive bill issuance. Treasury announced its intention in early June to refill the TGA by aggressively issuing short dated bills, which are particularly attractive to money market funds. The surge in issuance pushed bill yields above the expected path of the RRP and enticed money funds to move money out of the RRP and into bills. The rapid …
Published on June 5, 2023 by Joseph Wang Premium
A rapid decline in bank reserves is a headwind to all asset prices, but it need not be significant. In our two-tiered monetary system, a decline in bank reserves means both banks and non-bank investors have less cash and thus potentially less demand for financial assets. Banks may have less demand for high quality liquid assets like Treasury securities and non-bank investors may have less demand for riskier assets. In addition, while a decline in …
Published on May 30, 2023 by Joseph Wang Free
The hedge fund community appears to have returned as the marginal buyer of cash Treasuries through a resurgence of the cash futures basis trade. The recent surge in Treasury repo volumes and record short Treasury futures positioning by hedge funds strongly suggest a revival of the trade, which was popular prior to 2020. This would indicate steady demand for cash Treasuries even as the Fed and commercial banks moved from large net buyers to net …
Published on October 31, 2022 by Joseph Wang Free
A Treasury buyback program today would be mechanically equivalent to quantitative easing and a tailwind for risk assets. Buybacks funded by bill issuance would move cash out of the RRP and into the broader financial system. The end result would be an increase in cash held by banks and non-banks, both whom may rebalance their portfolios into other assets. In addition, the reappearance of a steady bid for coupon Treasuries would put downward pressure on …
Published on September 6, 2022 by Joseph Wang Free
A rapid decline in the level of bank reserves would be an obstacle to QT that may prompt action from the authorities. An aggressive QT was premised on first draining the large RRP balances, but the monetary plumbing suggested that was never likely. Banks can easily maintain their own reserve levels, but their own target levels are significantly below those of the Fed. This implies that bank reserve levels will likely fall below the Fed’s …
Published on August 15, 2022 by Joseph Wang Free
Treasury buybacks would be a powerful tool that could ease potential disruptions arising from quantitative tightening. The Treasury hinted in their latest refunding minutes of potential buybacks, which is when Treasury issues new debt to repurchase old debt. Buybacks can be used to boost Treasury market liquidity, but more importantly also allow Treasury to rapidly modify its debt profile. By issuing bills to purchase coupons, Treasury could strengthen the market in the face of rising …
Published on April 5, 2021 by Joseph Wang Free
Money is being poured into the system, and it has no where to go. The ON RRP is the escape valve, but it is fixed at 0% when money market fund (“MMF”) management fees are around 0.2%. The stars are aligned for continued flow into the money fund space, pushing front end rates towards 0% as it ultimately flows down the ON RRP drain. The Fed will continue to pump $120b/month into the banking system, …