Is The TED Spread Yellen?

Summary

Discussion of the potential effects on equity, bond, commodity, capital and asset markets regarding:

Fed Funds Rate Increase; New reverse repo cap;

Arbitrage margins in repo costs and reverse repo; Increases in Foreign Bank RRP;

Affect on short duration UST yields; A message from the TED Spread?

We Nattered here on SA regarding the Fed's raise in IOER (interest on excess reserves): "By raising RP, RRP and IOER what did the Fed just do? Think short term UST bills 6 month and shorter duration, which are all below IOER at .50bps" and about a potential effect on short term UST's: "Forget FFR, those who do not have access to the Fed's Reverse Repurchase facility may be forced to hold short-term Treasuries below the RRP rate. Can you say less allotment for short term T's below RRP? I can."

In brief, this is the fifth in a series of thematically related missives which will attempt to identify the macroeconomic forces with potential to adversely effect capital, commodity, equity, bond and asset markets.

FFR (Fed Funds Rate)

The Fed raise caused FFR (fed funds rate) to jump 22bps from 0.15% to 0.37%. Who deals in FFR anyway? GSE's: FHLMC, FNMA; Bank holding companies or BHCs, standalone commercial banks, foreign banking organizations or FBOs, and thrifts represented 25% of the total lending market at the end of 2012, compared with nearly 60% in Q4 2006.

As of Q4 2012, the other 75% of FFR lending was handled by FHLBs(Federal Home Loan Banks). What do some of these intrabank lending facilitators (the non DI's or non depository institutions) have in common?

Most importantly, as they do not hold balances at the FED, the GSE's and FHLB's are not eligible for Fed IOER (interest on excess reserves). However, their DI (depository institution) customers holding balances at the FED are eligible.

Those institutions now have a greater incentive to borrow at a rate below IOER and then hold the borrowed funds in their reserve account to receive IOER.

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