Category Archives: Blog

Who Are These Guys ?

On the 5 Year

By Vincent Cignarella
(Bloomberg) -- If the Fed were going to raise rates, central-bank demand at today’s 5Y auction would have been minuscule, Hilltop Securities’ Mark Grant writes in email; instead, indirects, which include CBs, took down record 68.7%.
Central banks “speak to each other” and “there is a very large hint here”; “central banks would be in with both barrels” if the Fed isn’t planning to raise rates

AND from Jeffries' Tom Simons via Fidelity Fixed Income: 5 Year has ALL Hallmarks of a Liquidity Event

Really guys? This is what passes for FI commentary 8 years into the Upside Down? The auction was either A) CB signaling the all clear or B) a system seizure. LULZY, please try a little. I understand Mr. Cignarella not chuckling and telling the esteemed Mr Grant (great name for an FI guy ) of Hilltop Securities to go read a book...but what the heck is Fidelity Fixed Income streaming on Mr. Simons' crazed opinions for?

Here's my advice to both men, unsolicited, from a grape stomping semi-retired former practitioner - Show 1 cell of dignity and RESIGN NOW. Get out of the game. You're making stuff up. There's plenty of actual weirdness going on in global FI, you don't need to fabricate sound bites and conspiracy theories. It is kinda funny though.

 

What if….

What if a rate rises in the woods at a "paced transition" and there's no one there to lift it?

Here's 2 clips from the Fed - the first from the May 2016 ARRC Roundtable and the second from Powell at the June 21 Roundtable forum:

MAY

"After extensive discussion, the ARRC has preliminarily narrowed the list of potential rates to two that it considers to be the strongest alternatives, the Overnight Bank Funding Rate and some form of overnight Treasury general collateral repurchase agreement (GC repo) rate. Because of the dominance of LIBOR in U.S. dollar interest rate derivative markets, planning for any transition to either rate poses a host of challenges. While the dealers and central counterparties currently represented in the ARRC play key roles in intermediating these markets, demand for interest rate derivatives is ultimately driven by end users. Therefore, it is key that end users play an integral role in the ultimate choice of an alternative and in an ultimate transition strategy. However, end users cannot be expected to choose or transition to trading a benchmark that does not have at least a threshold level of liquidity. Accordingly, the ARRC has thus far focused on formulating an initial transition strategy (the “paced transition”) that could potentially provide this threshold level of liquidity. This plan envisions gradually moving price alignment interest and also eventually discounting from the effective federal funds rate to the new rate chosen by the ARRC. If adopted, a paced transition would represent a first step in creating a liquid market for the alternative rate, but further work will be required – following consultation and close involvement with end users – both in developing the details of an initial transition strategy and in planning for a full transition strategy that would move a more significant portion of the derivatives markets away from LIBOR to the new rate. Following the publication of this interim report, the ARRC intends to consult widely and closely

JUNE

In saying this, I want to make it clear that LIBOR has been significantly improved. ICE Benchmark Administration is in the process of making important changes to its methodology, and submissions to LIBOR are now regulated by the United Kingdom's Financial Conduct Authority. However, the term money market borrowing by banks that underlies U.S. dollar LIBOR has experienced a secular decline. As a result, the majority of U.S. dollar LIBOR submissions must still rely on expert judgement, and even those submissions that are transaction-based may be based on relatively few actual trades. This calls into question whether LIBOR can ultimately satisfy IOSCO Principle 7 regarding data sufficiency, which requires that a benchmark be based on an active market. That Principle is a particularly important one, as it is difficult to ask banks to submit rates at which they believe they could borrow on a daily basis if they do not actually borrow very often.

That basic fact poses the risk that LIBOR could eventually be forced to stop publication entirely.

Sources tell me several wall hangers in the discussion wondered why the FF rate couldn't just be used.? This should startle you to realize many people charged with this mission are ignorant. The Powell quote shows more understanding, "as it is difficult to ask banks to submit rates AT WHICH THEY BELIEVE THEY COULD BORROW ON A DAILY BASIS IF THEY DO NOT ACTUALLY BORROW VERY OFTEN."  But he's wrong too - its actually far too easy.  In fact, you just submit what you want. And that is where all the Lie in "Lie-bor" originated. The rate was constructed to be the offered rate. What is the rate that you would, are, offer a like entity for this tenor. The revised, but obviously still used, bank manipulated question; Where do you BELIEVE you could borrow ? is at best the bid side and -as we found out - at worst a mirage.

But who cares? right...its just regulatory. And what difference if a few saps who took floating mortgages get bumped, right? But what of the alleged 300 TRILLION in "stuff" link-marked (can't really call it benchmarked anymore) to the ephemeral phantasm rate? The open interest in Gyro-dollars might be calculated to some other, prior, notion of said ghost/memory. It's just heartening to know smart people are on it !

Stranger Things

This morning I got an email from David Kotok of Cumberland Advisors. The title was "Libor !" and the gist - embedded in a half-dozen mind numbing analyst papers - was they had gone defensive because of the rising rate and widening spreads between HQLA and sub-HQLA "assets". This topic has been mentioned (cough, cough) several times in the delusional ramblings between me and my imaginary dog , Hooper, here in this blog.

Some background : When the recovery was in its infancy (the one that is "sub-par", "non-existent" or "just CB induced" depending on the pundit) the Obama administration invited a gaggle of us to the Treasury Dept. to meet with the economics team and discuss their plans and offer input. The Sec. of the Treasury, Tim Geithner (you know the guy everyone on TV painted as an idiot - but happened to be one of the brightest minds I've come across) was "officially" not there, (Spoiler Alert: he was there) Along with a few egomaniacs, a couple of interesting guys, a female copper haired consensus retail economist and one jaded small time trader (moi) was a polite and gracious older gentleman named Bob Eisenbies. This is where Bob, former Fed-er, now Chief Economist of Cumberland Advisors and I met and became friends.

Bob and I continued to chat after returning to our home bases and he mentioned our conversations to David who was kind enough to bump me to the head of the line with an invite to his annual fishing/shadow Fed awesomeness nicknamed Camp Kotok. The timing of this gathering is the first weekend in August which usually meant the Employment Report release would find us all jostling for phone/internet service before heading out to fish. If you noticed, there was a post about this year's confab on the back page of section 1 in last week's WSJ. So, my long winded "heads -up" is that a couple weeks after eating, drinking and fishing with some of the more dynamic thinkers, money managers and Fed staffers of the business; Cumberland has gone defensive.

 

Monday Patterns

We used to watch for linear days on Employment data. Another tid bit was 2 months revisions that go in same direction of the data print. The following Monday (i.e. today) would present an "inside up" (or inside down if a linear up day) and some position reduction. This would set up a Tuesday failure and new low (high). If the market continued the pattern creating an outside new range - like today - the move was more likely to be exhausted. Both Treasury Notes and Spoos are exhibiting the latter pattern characteristics today.

Friday Stuff

Things no one cares about except @Conorsen and me.

Treasury Bill rates look like this: 3m -.26. 6mo - .41. 1 year - .51 and 2 years at .76.

The 5 year is around 1.10 and the 10 year is 1.53. 1o year rates should be an extrapolation of 1 year rates into the future with various adjustments for coupons, day counts, forwards, futures and convexity.

3 month LIBOR set at .77 sending an old metric known as the TED spread out again. The 12 month rate (the rate we watch that fits nicely far enough away from the FF gravitational pull and  fills the gap until the 2 yr note) hit a new high of 1.47%. The 3 month set was 66 a month ago, when pundits began to count days and shrug off regulatory changes, and a paltry 30 one year ago today. Rates are falling I am told by the WSJ and the TV.

By next week, it is quite probable that 12 month "money" will be within a gnat's whisker of the 10 year government note rate. Ponder for a second the chasm between dollar interbank and many DM negative yielding "tax contracts." One has to wonder, how can the price of money be so high and debt yield so low? Considering that quantitative monetary policy is used to make the distinction between money and debt evaporate, what has gone wrong? More importantly, why are Conor and I the only 2 people who seem to care?

Who’s Doing It ?

WSJ Section C1, yesterday, upper right corner. Under the heading "Trading Places" a chart of the 6 year bear market in FI trading at GS, MS, C, BofA and JPM. Goldman and Citi vaporized the largest shares of FI trading with MS making a bold 2011 attempt to ramp up that was quickly aborted. Interestingly, the gist of the article was on increased scrutiny by the SEC to disclose more about their trading ops and revenues. "Hey, we realize you don't do this anymore, so could you now shed some light on it ?!"

The real question is, if these heavily regulated institutions are no longer in the business, who exactly is ? The market for FI is bigger than ever. Anything with a yield north of 1 is considered attractive by default. (see what I did there?) The truth is for all the whining about equity "dark pools", FI trading - from Uncle Sam's stuff to the sketchiest junk - is performed by a cabal of private low profile operators. Central Bank quantitative measures provide pedestrian cover to the activities. Ask John Q. who buys FI and he'll quickly tell you, "The Fed."

Witness the evaporation in JGBs of late and the regulatory reduction in Big 5 FI trading feels a little more scary. When bond prices fall, it seems no one is still "in the business."

Today’s Moment of Yen-I Mean Zen

Back when The Daily Show was funny and relevant, John Stewart used to end with "A moment of Zen" to capture the day's absurdity. Today's moment comes courtesy of Section C page 3 of the WSJ. Top headline: Yen Traders Fret Over Japan's Stimulus... Below: Tokyo takes long View:50 Year Debt..and to the side: Longer Bonds Hold Risks for Investors.

The Cliff's Notes version - Everyone has borrowed yen to buy long term bonds that don't yield very much but everyone wants them for capital gains in strange ETFs, so 50 year bonds sound great except the market is getting clobbered this month, wiping out years of returns and causing said massive positions to be unwound. But governments buy most of them anyway, which may or may not be inflationary depending on whether you are talking to Rick Santelli or the CEO of Whole Foods. Got It? And I wondered why neither of our would-be Presidents have commented on monetary policy.

My disinterest in government FI over the last 3 years has been well chronicled in this Blog. "Anything, and everything else" has been my advice. Hoarding low coupon debt for price increases is the Yang to the early 80's "certificates of confiscation" Ying . Yesterday, the Fed meeting results were released to the usual micro-parsing and insignificance. The Fed, I am now told by the parade of "watchers", "strategists" and "traders" is now Data Dependent. Zen moment redux.

The term structure of interest rates (Some guy, I heard he was awesome, used to speak of it on TV) is fercocked. The Journey back to Ixtlan (#GIK) will be a wild and transformative process far beyond the grasp of our soon to be Commander in Chief. It is ALWAYS about the positions. Those positions are starting to change.

On Money

Today, as @Conorsen tweeted out, the "benchmark" LIBOR hit a new cycle high with the 12 month rate (#GIK) offered at 1.37%. (Long time delusional readers know this means we put the equilibrium FF rate at .77, thus CB policy has been quite accommodative of late) The 10 year government bond is yielding 1.57 but was at 1.37% as recently as July 5 ! Any casual observer of Dodd-Frank and its morphings understands the regulatory aspect of wider interbank sets. Many of us began to estimate where the "Financial System 2.0" spreads should be as long as 7 years ago.

The WSJ has several articles highlighting the interest "savings" of low (Negative - hello Spanish 2 year auction) rates on borrowing governments. At the height of the "Debt Crisis" debate and populist fear mongering, we argued that just changing the trend and letting the economy grow was more than adequate policy. Even marginal growth rates have delivered adjustments large enough to bring  more pundits to our "Issue more for longer" camp.

The critical distinction is the difference between money and debt, even as quantitative policies seek to blur and merge (blurge?) the two. The dollar's waxing and waning becomes a Dramamine ingesting barometer for clues to what lies down the road. Currencies, especially global fiat currencies, are poor compasses to steer policy by, however. Which takes us back to interbank benchmarks. In a world of Central Banks exotically bolstering government borrowings with Flying Buttress purchases, the risk-free rate becomes irrelevant. "Things" other than risk-free are better reflections of financial system vitals. Here's the message, their yields are going UP.

Corn Sweat

Corn has lost a dollar in value recently and the entire grain complex completed down patterns in the model again Friday. Farmers are hoping the high temps over the next week produce some kind of price pop. No one we have spoke to since arriving in the mid-west feels loftier pricing can be sustained for long, however.

So much product has been planted in the age of abundance that a new weather condition has developed in the Plains called Corn Sweat. High heat and fence post to fence post "Frankencorn"  combine to sweat so much moisture into the air as to send humidity readings and the heat index soaring. Watch for this phenomenon this week.

We have felt that income bumps and basic service price increases would combine to nudge inflation readings up enough to expose the folly of low (negative) FI renting for capital gains. Public transportation, road tolls, rents and Starbucks are all costing more. The incoming weather pattern should provide some flopping around in grains but the crop as a whole remains enormous.

The Other Exit

Star Wars creator, and Chicago political player Melody Hobson's husband, George Lucas exited Chicago and returned to the Left Coast on Friday. The "Friends of the Parks" group, which has done some good protecting Burnham's vision, had tied Lucas up in the courts over a parking lot. The billions of dollars lost in this populist battle could have fixed the air-port flaw in the Death Star and returned the Big Onion to the world stage.

Chicago, as is its host State, is in a monetary crisis. That a Lucas-sized construction and tourist project could be lost faster than the Millennium Falcon can do the Kessel Run is astounding. That the job couldn't articulate its way through the Machine is testimony to Rahm's inabilities. Daley would have "got her done." So, take a spin southbound on LSD and enjoy the view of crumbling asphalt and wasted space, hum the Star Wars theme and imagine what might have been...a long time ago in a city far far away.