In The Long Run, How Long?
Last time out regarding swap rates and negative swap spreads....
May 14th - Long run 2 - 30yr sold off, yields up. 1yr and under "short run on the money" getting the bid, yields down. In the last week 5yr ICE swap rate -10bps; 10 yr -7bps which means lower rate/growth expectations moving forward. And now this cogent comment...
The 2yr and 5yr basis Daily Treasury Yield Curve Rates, are lower than the remuneration rate @ 2.35% since 3/22/19.
In other words, all money market retail and wholesale pipeline sourcing rates are currently higher than those necessary for profitability in the upward sloping lending-process of maturity transformation (borrowing short-term liabilities to fund longer-duration investments).
A profitable spread was once considered to be 3 percentage points. Today there is substantial substitutability between short-term and long-term funding. This creates mismatches between assets and the roll-over of liabilities via a downward sloping rate curve (an inversion or even flattening of interest expense, the cost of borrowed money, from positive margins supported by business opportunities, to intertemporal funding spreads).
This situation is contractionary only if continued. It represents the pervasive outlook among businesses, of an upcoming decline in aggregate demand, or economic prospects. - 07 May 2019, 03:24 PM Salmo Trutta
The Nattering One muses... Speaking of money market retail and wholesale pipeline sourcing rates currently being higher than those necessary for profitability...
On May 2nd IOER was cut to 2.35, thus IOER is on par with the 1 yr, still ABOVE the 2, 3, 5 and 7yr and now BELOW all other tenors, and 5bps below EFFR at 2.40. Those who can access the window still get repo at 2.25, those who cannot might get GCF at 2.43.
What does one think happened in a certain market making space when IOER got cut by a 5 bps margin? Me thinks the price of poker or the cover charge to get on the Eccles dance floor went up.
If fewer participants want to make the market, perhaps those in need are having to source their "dollars" elsewhere, viz. liquidation of dollar assets? viz. May 2nd, +5bps for ED "market making", probably doing wonders for ED "dollar" funding? Not. Resulting in Elsa Klensch and the Riddle of the Financial Sphincter?
A potential explanation of the market selloff of late? In The Long Run...
Lower swap rates minus higher T yields = increasing negative swap spreads. The 10yr swap spread has been stagnant around -0.02900. Not a good sign but nice for those who can afford to arbitrage it, and have the capital to do so.
Thus, a surfeit of misallocated capital in concert with a dearth of durable economic investment, begets a pervasive outlook for economic prospects, which becomes a self reinforcing vortex. Oh the irony of it all?
Speaking of financialism related misallocation of capital, and contractionary economic trajectory... you can rock yourself to sleep, how long, How Long?
More to come in Swap Rates Speak? Stay tuned, no flippin.
Trebek queries as long as LIBOR rates are above repo this is a risk free arb? NYFRB window repo at 2.25 to 2.35, BGCR/TriParty at 2.35 and GCF repo at 2.43.
SOFR at 2.38, ON Libor at 2.34; 30 day Libor at 2.43 and 90 day Libor at 2.52. What is becoming a limited "few and the proud" still able or willing to arbitrage this?
Hint: ask the man at the window who seems to be flipping the light switch on and off for the Eccles dance floor, because perhaps there is less? or... [No Parking On The Dance Floor] - Less Parking On The Eccles Dance Floor?Reviewing... May 13th - huge sell off...
May 14th - Long run 2 - 30yr sold off, yields up. 1yr and under "short run on the money" getting the bid, yields down. In the last week 5yr ICE swap rate -10bps; 10 yr -7bps which means lower rate/growth expectations moving forward. And now this cogent comment...
The 2yr and 5yr basis Daily Treasury Yield Curve Rates, are lower than the remuneration rate @ 2.35% since 3/22/19.
In other words, all money market retail and wholesale pipeline sourcing rates are currently higher than those necessary for profitability in the upward sloping lending-process of maturity transformation (borrowing short-term liabilities to fund longer-duration investments).
A profitable spread was once considered to be 3 percentage points. Today there is substantial substitutability between short-term and long-term funding. This creates mismatches between assets and the roll-over of liabilities via a downward sloping rate curve (an inversion or even flattening of interest expense, the cost of borrowed money, from positive margins supported by business opportunities, to intertemporal funding spreads).
This situation is contractionary only if continued. It represents the pervasive outlook among businesses, of an upcoming decline in aggregate demand, or economic prospects. - 07 May 2019, 03:24 PM Salmo Trutta
The Nattering One muses... Speaking of money market retail and wholesale pipeline sourcing rates currently being higher than those necessary for profitability...
On May 2nd IOER was cut to 2.35, thus IOER is on par with the 1 yr, still ABOVE the 2, 3, 5 and 7yr and now BELOW all other tenors, and 5bps below EFFR at 2.40. Those who can access the window still get repo at 2.25, those who cannot might get GCF at 2.43.
What does one think happened in a certain market making space when IOER got cut by a 5 bps margin? Me thinks the price of poker or the cover charge to get on the Eccles dance floor went up.
If fewer participants want to make the market, perhaps those in need are having to source their "dollars" elsewhere, viz. liquidation of dollar assets? viz. May 2nd, +5bps for ED "market making", probably doing wonders for ED "dollar" funding? Not. Resulting in Elsa Klensch and the Riddle of the Financial Sphincter?
A potential explanation of the market selloff of late? In The Long Run...
Lower swap rates minus higher T yields = increasing negative swap spreads. The 10yr swap spread has been stagnant around -0.02900. Not a good sign but nice for those who can afford to arbitrage it, and have the capital to do so.
Thus, a surfeit of misallocated capital in concert with a dearth of durable economic investment, begets a pervasive outlook for economic prospects, which becomes a self reinforcing vortex. Oh the irony of it all?
Speaking of financialism related misallocation of capital, and contractionary economic trajectory... you can rock yourself to sleep, how long, How Long?
More to come in Swap Rates Speak? Stay tuned, no flippin.
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