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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Levering Up

Published on February 5, 2024 by Premium

The large supply of Treasuries continues to be absorbed by the cash-futures basis trade, but new research is revealing some of the drivers behind the trade that shed light on its potential limits. Circumstantial evidence suggest that the cash-futures basis trade has surged to all time highs in line with ongoing growth in coupon issuance. While the trade depends on the capacity and willingness of dealers and hedge funds, it also depends on continued investment

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RIP Federal Funds Market, 1928-2023

Published on November 13, 2023 by Premium

The Federal Funds market has been in an undead state for over a decade, but may now finally wither away and allow SOFR to become the official policy rate. Almost all lending in the funds market is from Federal Home Loan Banks, who are ineligible for interest on reserves and lend in the funds market to earn a return on their cash. Potential new regulations are likely to significantly shrink the fed funds market by

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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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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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A Beautiful Replenishment

Published on July 17, 2023 by 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

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Reserves and Asset Prices

Published on June 5, 2023 by 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

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Back to 2019

Published on May 30, 2023 by 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

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Quantitative Buybacks

Published on October 31, 2022 by 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

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