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Message
re: I think its time we talk about the next Fed policy tool (9/17 Update - Neutered)
Posted on 2/21/14 at 4:20 pm to Iowa Golfer
Posted on 2/21/14 at 4:20 pm to Iowa Golfer
quote:
he short term rate portion specifically. There are enough dark pools out there that could, and would likely fill this void to an extent.
How so and what are your definitions of dark pools? Specifically within fixed income, you could technically consider most trading "dark pools" given a very liberal definition as most trading is OTC. Which void are you referring to?
1
Posted on 2/21/14 at 7:08 pm to BennyAndTheInkJets
Edit.
Deleted. It is a lengthy explanation, and the original post was lacking. I'll be back when I actually have some time to respond.
Deleted. It is a lengthy explanation, and the original post was lacking. I'll be back when I actually have some time to respond.
This post was edited on 2/21/14 at 7:19 pm
Posted on 2/21/14 at 7:30 pm to BennyAndTheInkJets
quote:
If the counterparty list is expanded enough, this facility could essentially floor short-term market rates. It will break the divergence between the Fed Funds target rate and short-term rates and could fend off any threat of negative nominal rates. It also gives the Fed something to do with all that balance sheet, as they weren't going to sell securities but just let them roll off. Some Fed officials have spoke about the Fed issuing bills, and this facility essentially does the same thing.
The Fed operation is so friggin elegant. Today there were 57 bidders for 104 billion but there is one big problem about expanding the list: FED runs the risk of the money getting lent out into the public.
The primary dealers probably don't care about institutions bypassing the PD's and going directly to the fed because of the large numbers. Presently, it is easing collateral issues. Are there any adverse effects for the primary dealers going forward with an expanded repo facility?
Not saying the FED won't expand the list, but if they do, it will be closely controlled. Reverse repo facility probably won't help employment or the economy in general, but it would be tremendously bullish for assets. Could see 200 billion in daily operations by 2015.
Posted on 2/21/14 at 9:03 pm to Blakely Bimbo
I think you may be getting this process in reverse but I'm not sure? On one hand:
This isn't true as the Fed is borrowing cash and posting collateral to counterparties, so it is a liquidity tightening mechanism. Unless you're referring to the excess returns, which although potentially higher are still fairly low since repo rates are annualized. Your end result is still not exactly gangbuster returns all things considered. Could you expand a little bit? However:
This is true and why I'm confused, as it is providing more securities collateral to the market. Sorry I may be missing your overriding point here.
quote:
FED runs the risk of the money getting lent out into the public.
This isn't true as the Fed is borrowing cash and posting collateral to counterparties, so it is a liquidity tightening mechanism. Unless you're referring to the excess returns, which although potentially higher are still fairly low since repo rates are annualized. Your end result is still not exactly gangbuster returns all things considered. Could you expand a little bit? However:
quote:
Presently, it is easing collateral issues.
This is true and why I'm confused, as it is providing more securities collateral to the market. Sorry I may be missing your overriding point here.
This post was edited on 2/21/14 at 9:15 pm
Posted on 2/21/14 at 9:14 pm to Iowa Golfer
quote:
Deleted. It is a lengthy explanation, and the original post was lacking.
Completely understand. It would be a little bit of an understatement to say I'm fairly close to fixed income and the short-term markets so I'm really interested in what you're referring to.
Posted on 2/21/14 at 9:31 pm to LSURussian
quote:
BennyAndTheInkJets>>>>>>>>>Doc Fenton
Doesn't mean that Doc is a piker.
Posted on 2/22/14 at 5:04 am to BennyAndTheInkJets
quote:
quote:
Deleted. It is a lengthy explanation, and the original post was lacking.
Completely understand. It would be a little bit of an understatement to say I'm fairly close to fixed income and the short-term markets so I'm really interested in what you're referring to.
Posted on 2/22/14 at 11:19 am to Iowa Golfer
I'm going to back out of this. I was taking a different approach based on short term lending rates, and my experience on the board of a community bank. I wasn't really referencing money market rates, and bank's arbitrage, which they do already anyway. At least we did.
In any event, with respect to short term lending rates, the market will merely match borrower with dark pool lenders, just as they do today, and short term borrowing rates will in certain instances continue to not be impacted by fed. policy. Just as it is today.
The dark pool liquidity I'm referring to is a long explanation. While true much of this market could be considered dark pool, this is only true insofar as they aren't disclosing bid and ask, they are disclosing quantity orders. It's an interesting deal. In equity for example, on Friday I bought UUUU at $8.50. Take a look at the executed trades and see if you can find mine. Many explanations. It could be a bd, or mm, who had excess shares, or it could have been a dark pool unloading. It depend how the order is routed, and it is the same when purchasing fixed income if you do this with direct access.
I think I'm talking about a completely different thing than the op, so I'm going to quit. FWIW, most places agree with the op with respect to fixed income, and much of his thesis is verbatim.
From a personal opinion perspective, I'm not sure how much I like the fed having influence on certain markets where they didn't before, and I think this experiment is necessary because they have never had to unwind this much liquidity. Which they really caused themselves. They can blame it on the bubble all they want, but they in fact caused the bubble. In the end, many of the counter parties were actually made whole by the swaps, those evil instruments, that actually serve a necessary purpose. The lack of properly reserving these is a separate issue not related to liquidity
In any event, with respect to short term lending rates, the market will merely match borrower with dark pool lenders, just as they do today, and short term borrowing rates will in certain instances continue to not be impacted by fed. policy. Just as it is today.
The dark pool liquidity I'm referring to is a long explanation. While true much of this market could be considered dark pool, this is only true insofar as they aren't disclosing bid and ask, they are disclosing quantity orders. It's an interesting deal. In equity for example, on Friday I bought UUUU at $8.50. Take a look at the executed trades and see if you can find mine. Many explanations. It could be a bd, or mm, who had excess shares, or it could have been a dark pool unloading. It depend how the order is routed, and it is the same when purchasing fixed income if you do this with direct access.
I think I'm talking about a completely different thing than the op, so I'm going to quit. FWIW, most places agree with the op with respect to fixed income, and much of his thesis is verbatim.
From a personal opinion perspective, I'm not sure how much I like the fed having influence on certain markets where they didn't before, and I think this experiment is necessary because they have never had to unwind this much liquidity. Which they really caused themselves. They can blame it on the bubble all they want, but they in fact caused the bubble. In the end, many of the counter parties were actually made whole by the swaps, those evil instruments, that actually serve a necessary purpose. The lack of properly reserving these is a separate issue not related to liquidity
Posted on 2/23/14 at 2:36 pm to BennyAndTheInkJets
quote:
I think you may be getting this process in reverse but I'm not sure? On one hand:
Just thinking out loud about why FED would want to limit number of institutions with access. Right now IIRC list is 50 plus institutions. IF FED expands the access list AND IF the FED upped the daily limit (I believe they upped it to $3 bill a day around XMAS?) AND IF repo is rolled AND the COLLATERAL is levered X times...
Is it correct to state that the intent is to provide quality collateral for parties to use in the tri party repo market? Can that then be multiplied?
Posted on 2/23/14 at 6:06 pm to Iowa Golfer
quote:
I'm going to back out of this. I was taking a different approach based on short term lending rates, and my experience on the board of a community bank. I wasn't really referencing money market rates, and bank's arbitrage, which they do already anyway. At least we did.
No need to "back out", its just a discussion. I have a friend that runs the asset management side of a mid-sized bank (~$10B) so I have some outside perspective on the commercial bank side but not a hands on one, so I'd be interested in your thoughts. One former Fed official told me that they thought of this as a way to control Fed liabilities in addition to assets (via IOER), an my interpretation of that was in the OP regarding competitive short-term lending rates forcing banks to raise their deposit rates (a little too reminiscent of the S&L crisis for me
). Would that be your interpretation as well? quote:
The dark pool liquidity I'm referring to is a long explanation.
I have friends that work in dark pool equity trading so I understand that side if that's what you're referring to with the UUUU example although I think you're referring to something else which I'd be interested in. Honestly, I think the term "dark pool" gets thrown around too much as its often used to just refer to trading that's done off exchange with less than complete transparency. In fixed income, almost all trading would fall into that definition as the historical bid/asks and available quote depth would only be available on historical dealer runs and books. You could get transaction prices from Bloomberg, IDC, Markit, etc. and volume/frequency from TRACE but unless you're seeing some of the big managers or primary dealers books you are only getting ex-post information.
quote:
From a personal opinion perspective, I'm not sure how much I like the fed having influence on certain markets where they didn't before, and I think this experiment is necessary because they have never had to unwind this much liquidity. Which they really caused themselves. They can blame it on the bubble all they want, but they in fact caused the bubble.
This is more ideological in nature but it is a fair argument, although I wouldn't agree that the Fed specifically caused the bubble (everyone was too blame, personally I think regulators dropped the biggest ball).
This post was edited on 2/23/14 at 8:33 pm
Posted on 2/23/14 at 6:19 pm to Blakely Bimbo
quote:
Just thinking out loud about why FED would want to limit number of institutions with access. Right now IIRC list is 50 plus institutions.
I believe the list is right at 134 counterparties right now. It's not that they want to limit the list, they're just taking it step by step, offering first to 2a-7 funds, banks, and GSEs. The expectation is that they'll expand soon, they don't want a small counterparty list because that defeats the purpose of it. They're just taking their time to make sure its implemented correctly.
quote:
(I believe they upped it to $3 bill a day around XMAS?)
It's up to $5B now and they'll likely increase this fairly soon.
quote:
Is it correct to state that the intent is to provide quality collateral for parties to use in the tri party repo market?
I wouldn't say that's the intent, rather just another use of the facility. I think the true purpose is to narrow the divergence around short-term rates. Repo, IOER, Fed Funds market, Fed Funds target, etc. all trade at different levels, sometimes very different. This facility at the end of the day, if successful, will set a floor on short-term rates. If the FRFA RRF can give you 20bps, other repo rates shouldn't be trading at 15bps (assuming a robust counterparty list).
quote:
Can that then be multiplied?
Yes, one of the biggest reasons repo is preferred over securities lending is due to the legal ownership of collateral. The lender of cash/receiver of collateral has legal ownership of the collateral so they can sell this security, post as collateral, lend out, etc. as long as they get that same CUSIP to "sell back" to the repo borrower. Economic ownership (i.e. accrued interest) is still with the borrower of capital.
This post was edited on 2/23/14 at 8:35 pm
Posted on 2/24/14 at 7:46 am to BennyAndTheInkJets
How about outside the Fed? These inflation reports from the Eurozone continue to come in remarkably weak (0.8% y/y in both Dec. and Jan.; Jan. prices down 1% from Dec.). I think we could see some more stimulus there.
This post was edited on 2/24/14 at 8:08 am
Posted on 2/24/14 at 1:39 pm to RedStickBR
That's a very interesting area right now. The ECB got away with stimulating the Eurozone without spending a single euro through their OMT program, all that happened was Draghi's "Whatever it takes" speech. That notion has never been challenged but there has been several events that have been bullish for Europe. The German court did not explicitly dismiss the OMT program, several ECB members have spoke to possibly being more accomadative, and the ECB outright cut rates in November.
Now this is mostly still OMO (Open Mouth Operations) outside of the rate cut so we'll see how the political dominoes fall if Europe actually has to put their money where their mouth is. I think they are more inclined to be accommodative than previously since they are "behind" the Fed and BOE. That being said, I will never try to predict politics for the EU, you have 17 member states with widely different political views and an even bigger divergence between what the elder population and younger population will support.
Now this is mostly still OMO (Open Mouth Operations) outside of the rate cut so we'll see how the political dominoes fall if Europe actually has to put their money where their mouth is. I think they are more inclined to be accommodative than previously since they are "behind" the Fed and BOE. That being said, I will never try to predict politics for the EU, you have 17 member states with widely different political views and an even bigger divergence between what the elder population and younger population will support.
Posted on 2/25/14 at 8:08 am to BennyAndTheInkJets
Posted on 2/25/14 at 8:31 am to BennyAndTheInkJets
Is Doc a piker? Does he walk at the bell?
Posted on 3/4/14 at 2:28 pm to BennyAndTheInkJets
Here ya go, Benny....
Bump to 7 billion per starting tomorrow.
FED
Bump to 7 billion per starting tomorrow.
quote:
As noted in the September 20, 2013, Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise, the Open Market Trading Desk at the Federal Reserve Bank of New York has been conducting daily, overnight fixed-rate reverse repo operations as part of an operational readiness exercise. Beginning with the operation to be conducted tomorrow, Wednesday, March 5, the per counterparty bid limit for each operation will increase from $5 billion to $7 billion. All other terms of the exercise will remain the same. As an operational readiness exercise, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.
FED
Posted on 3/4/14 at 2:40 pm to Blakely Bimbo
I'm assuming the next move, outside of changing the rate or the range for the rate, will be expanding the counterparty list. That's going to be an absolute must in making this facility effective.
Fisher and Plosser actually dissented in the Fed minutes
I think the next set of minutes may give us a better sense of what the members think about the counterparty list.
Fisher and Plosser actually dissented in the Fed minutes
quote:
Messrs. Fisher and Plosser dissented because of their preference for retaining a cap on the maximum size of counterparties’ offers during the extension; Mr. Plosser also preferred a shorter extension of the exercise.
I think the next set of minutes may give us a better sense of what the members think about the counterparty list.
Posted on 3/4/14 at 2:53 pm to BennyAndTheInkJets
quote:
'm assuming the next move, outside of changing the rate or the range for the rate, will be expanding the counterparty list. That's going to be an absolute must in making this facility effective.
Insurance companies too, Benny? I really believe that the FED will be "prudent" as they admit in their statement above. Very elegant. When the history books are written about the financial crisis, it will be the FED who saved the world.
JMO, but I think the operation is very bullish for stocks.
Posted on 5/23/14 at 1:29 pm to BennyAndTheInkJets
Benny, I am bumping this thread because it may be time to take another look at RRP.
I have been watching TOMO daily and it is increasing.
TOMO
Just taking cash out of the system is not as beneficial as providing the AAA securities for the collateral chains provide the "lubrication" of the global financial system.
So, now Bernanke speaks at his intimate dinners:
He's talking about the Fed funds rate. What the RRP might provide and the FED MAY be thinking is an alternative market determining IOR target.
What if sometime in the future a Repo index is an alternative to OIS? Plausible?
Here is 1/2014 paper paper from Gagnon and Sack.
Peterson Institute
My knowledge of the interbank market is rudimentary. Would existing interest rate contracts be affected? Just trying to take a very complicated subject and keep it simple.
The RRP still providing liquidity in diminishing QE environment.
I have been watching TOMO daily and it is increasing.
TOMO
Just taking cash out of the system is not as beneficial as providing the AAA securities for the collateral chains provide the "lubrication" of the global financial system.
So, now Bernanke speaks at his intimate dinners:
quote:
does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke’s lifetime.
He's talking about the Fed funds rate. What the RRP might provide and the FED MAY be thinking is an alternative market determining IOR target.
What if sometime in the future a Repo index is an alternative to OIS? Plausible?
Here is 1/2014 paper paper from Gagnon and Sack.
Peterson Institute
My knowledge of the interbank market is rudimentary. Would existing interest rate contracts be affected? Just trying to take a very complicated subject and keep it simple.
The RRP still providing liquidity in diminishing QE environment.
Posted on 5/25/14 at 2:10 pm to Blakely Bimbo
Much respect to you for paying attention to the most important yet overlooked part of the market. quote:
I have been watching TOMO daily and it is increasing.
Yep, as they've increased the allotment size and collateral continues to shrink (hence pushing rates down), 2a-7 money market funds have been using it more and more. If you want to see a huge allotment just wait for Q2 end next month.
quote:
Just taking cash out of the system is not as beneficial as providing the AAA securities for the collateral chains provide the "lubrication" of the global financial system.
The collateral is huge, but also the facility has absolutely been a floor on interest rates. With rates rallying this year and bill issuance continuing to drop, my personal belief (and one that is shared quietly with several repo traders) is that you would've likely seen instances of negative short-term rates this year without the RRF.
quote:
He's talking about the Fed funds rate. What the RRP might provide and the FED MAY be thinking is an alternative market determining IOR target.
Yea and Gross is on the same kick with the "New Neutral" of lower average policy rates, which was actually what I was predicting with Doc a while ago (albeit Bill has A LOT more in depth reasons for his new neutral stance compared to my points in that thread). Regarding the IOER, that's really one of the big points for the RRF. IOER can only touch banks, the RRF gives IOER for the market. A lot of people don't think the RRF top end range will touch IOER before the Fed actually raises rates, I don't know nor think they have any strong reasons for or against it.
quote:
What if sometime in the future a Repo index is an alternative to OIS? Plausible?
I don't think it will be an alternative for it, rather it will just set a floor for it. If OIS trades lower than RRF then it will be an alternative because banks will use that, however I doubt OIS will fall below the RRF range. The facility has essentially set a floor on all short-term rates so far. You'll rarely see morning cash repo trade at below 4-5bps. Once you get later in the day and collateral is tougher to come by then you'll see the 2-3bps range but that's just because it's late.
quote:
Here is 1/2014 paper paper from Gagnon and Sack.
I actually have not read this before, thank you.
quote:
Would existing interest rate contracts be affected? Just trying to take a very complicated subject and keep it simple.
Regarding which contracts? Like OIS or term repo? The current mark-to-market would be affected for OIS because rates would rise but other than that you'll just see more of a change with the fixed rate in future agreements.
quote:
The RRP still providing liquidity in diminishing QE environment.
That it is and although I previously predicted that the next move would be the Fed widening the counterparty list, I think I've started moving more towards some others camp that think that before the end of the year you'll see a full allotment (unlimited) facility first.
The next two years are going to be very important to watch this facility as the Fed raises rates. Because the market isn't going to immediately price in a rate hike when they announce a rate hike. The market is going to immediately price it in when the rate range for the RRF is changed enough. For example if late next year in the Fed announcement you see them say something to the effect of "the FOMC [etc.] will increase the target range for the reverse repo facility to 20-25bps", then that's going to be the equivalent of a 25bps rate hike in the market's eyes.
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